tag:blogger.com,1999:blog-30460718614949862992024-03-13T08:11:15.599-07:00Magic, maths and moneyThe relationship between science and finance.Tim Johnsonhttp://www.blogger.com/profile/06952723922503939504noreply@blogger.comBlogger118125tag:blogger.com,1999:blog-3046071861494986299.post-15285593300643197442019-05-17T07:20:00.001-07:002019-05-20T00:02:54.262-07:00Ethics and actuaries: issues and opportunities<div class="MsoNormal">
<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif; font-size: small;">I was invited by the “London Markets Actuarial Group”, made
up of general insurance actuaries, to speak at an ethics workshop. This post is
about some observations I have from this experience. My observations are
critical. This does not mean I believe actuaries are not well-intentioned,
rather there might be gaps in their understanding that inhibit clear ethical
reasoning. The purpose is to highlight how ethical assumptions are always
questionable and it is by asking questions that an individual becomes ethical.</span></span></div>
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<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;">The context is that the professional body of UK actuaries, the
IFoA, requires members to undertake two hours CPD on ethics a year and the
workshop was a means to accomplish this requirement. I had been asked to
comment on, amongst other topics: whether ethics just comes down to personal
opinion; what is meant by “the public interest” and some comment on how ethics
relates to managing risks, the core competence of actuaries. The organizer came
up with some simple “cases” to make my theoretical session more interactive.</span></span></div>
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<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;">I began by asserting that ethics was not personal with the
explanation that ethical norms were socially constructed and rooted in culture.
This basis does not imply that ethical norms are necessarily relative. I gave
the examples of truth telling and promise keeping as being essential to enable
communication (without mentioning higher order moral absolutism and token
absolutism). I explained that “emotivism”, the attitude that moral statements
are simply expressions of personal preferences developed in the context of
twentieth century logical-positivism and is, today, rather peripheral. I observed
that emotivism, as a branch of non-cognitivism, is based in Hume’s idea that
moral judgements are essentially passions (desires that motivate action). I
suggest that this is an error, in that the motivating desire is a well-running
society and moral norms are thus a means to fulfil that desire. The norm of
truth telling is not the aim; effective communication is, truth telling is a
rational means of achieving communication.</span></span></div>
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<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;">I also made the observation that “being ethical” was not the
same as being a “good person”. The point here is that ethics requires thought
and reason. Kant made the point, which is contested, that an impulsive act
might be good but cannot be ethical. The importance of distinguishing being
“good” from being “ethical” is that if questions are approached on the basis of
“good” and “bad” the discussion can quickly become polarised, inhibiting
discussion, which actually inhibits ethical consideration. A common experience
is when politics comes down to being “good” rather than seeking an effective
means of attaining policy ends (which are typically common across the political
spectrum).</span></span></div>
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<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;">I then, very briefly, summarise the three main approaches to
ethics: consequentialist, deontological and character. I began with
consequentialism because it is so dominant in finance, mentioning that there
are fundamental issues with the foundations of consequentialism; such as, how
are consequences identified and assessed and how are they weighted for
different people. I gave the classical example of someone taking a lonely
neighbour out for a coffee; if the neighbour was killed by a car on the way
home, as a consequence of the act, consequentialism would be critical of the
actions, though most would think the act of kindness was morally right. I then
moved on to a similarly brief explanation of deontological ethics, emphasising
their basis in promulgated rules before discussing Kant’s categorical
imperative, though I don’t think I mentioned the requirement to treat others as
ends in themselves, and not means to an end.</span></span></div>
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<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;">There followed a discussion of the following “case”</span></span></div>
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<ul><span style="font-family: "calibri";">
<li><div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">Your firm uses a sophisticated renewal pricing algorithm, so that the least price-sensitive customers will be charged a higher price.</span></div>
</li>
<li><div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">You are aware of the regulatory concerns about this practice, and so the algorithm has been adjusted to cap the prices for those customers that could be categorised as “vulnerable”.</span></div>
</li>
<li><div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">This approach means that your firm offers insurance to a far wider customer base than would otherwise be the case. </span></div>
</li>
</span></ul>
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<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;">I noted that the second point seems to address deontological
concerns while the third appears to justify the practice on consequentialist
terms. I then mentioned that I had recently seen my car insurance quote, from
the same provider, drop 30% by asking for quotes from a price comparison
website. I observed that, as a customer, I had issues with this type of
practice. </span></span><br />
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<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;">An initial comment was that customers who shop around were
lower risk, and so should pay lower premiums. My observation here is that
ethical reasoning must be based on matters of fact. For example, I cannot
justify sacrificing children because the sacrificial act appeases the great god
and will improve crop yields; this justification is not factual. In the case
presented, I would challenge whether there was a causal relationship between
“shopping around” and being a lower risk driver. There may be a correlation,
but actuaries should be competent at understanding correlation is not
causation. The correlation between “shopping around” and “low risk” is likely a
consequence of a common underlying factor, such as education. This is covered
by quoting based on occupation meaning that the explanation that “shopping
around” is relevant information is a bit dubious. </span></span></div>
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<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;">The fundamental ethical issue here is to what extent are
insurers treating their customers as ends in themselves, rather than as a means
to a personal (corporate) end? The response would probably be that customers
are free to shop around and since the insurers are not inhibiting the customers
autonomy there is no problem. I think this is open to discussion.</span></span></div>
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<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;">I was left wondering how familiar actuaries are with
emergent issues around algorithmic decision-making being highly discriminatory.
Two, of many, books on the topic are: </span><a href="http://www.hup.harvard.edu/catalog.php?isbn=9780674368279"><span style="color: #0563c1; font-family: "arial" , "helvetica" , sans-serif;">The Black Box
Society: The Secret Algorithms That Control Money and Information</span></a><span style="font-family: "arial" , "helvetica" , sans-serif;"> written
by a lawyer (the HUP page has lots of additional resources); </span><a href="https://weaponsofmathdestructionbook.com/"><span style="color: #0563c1; font-family: "arial" , "helvetica" , sans-serif;">Weapons of Math Destruction:
How Big Data Increases Inequality and Threatens Democracy</span></a><span style="font-family: "arial" , "helvetica" , sans-serif;"> written by a
mathematician. Actuaries are free to disagree with these accounts, but they
should be aware that these debates are important and might impact actuarial
practice in the future.</span></span></div>
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<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;">Another comment made by a participant, I can’t recall if it
was at this point, was that insurers need to be flexible in pricing to allow
cross-subsidisation. I think the context was that margins on car insurance were
very tight and so profits had to be sought elsewhere. Well established
financial theory (for example, </span><a href="https://mises.org/sites/default/files/Risk,%20Uncertainty,%20and%20Profit_4.pdf"><span style="color: #0563c1; font-family: "arial" , "helvetica" , sans-serif;">Risk
Uncertainty and Profit</span></a><span style="font-family: "arial" , "helvetica" , sans-serif;">) would suggest that the margins on car insurance, a
mature business with lots of relevant data, should be almost non-existent; the
market is working well if the margins are tight. What is less clear is why there
should be cross-subsidies in car insurance?</span></span></div>
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<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;">Cross subsidising, the practice of charging higher prices to
one type of consumers to artificially lower prices for another group, is not the
same as pooling, as pooling is amongst similar consumers and a core competency
of actuaries is to discriminate different types of customers. Since there are </span><a href="https://webarchive.nationalarchives.gov.uk/20140403003432/http:/www.competition-commission.org.uk/assets/competitioncommission/docs/pdf/non-inquiry/rep_pub/reports/2009/fulltext/542.pdf"><span style="color: #0563c1; font-family: "arial" , "helvetica" , sans-serif;">legal</span></a><span style="font-family: "arial" , "helvetica" , sans-serif;">
and </span><a href="https://www.fca.org.uk/publication/occasional-papers/op16-22.pdf"><span style="color: #0563c1; font-family: "arial" , "helvetica" , sans-serif;">regulatory</span></a><span style="font-family: "arial" , "helvetica" , sans-serif;">
issues around cross-subsidies, I was surprised to hear this being offered as a justification
for specific pricing policies, since they may create operational (regulatory or
legal) risks. One moral issue is: what gives insurers the right to determine
which type of consumer should be being subsidised and which type should be
being penalised?</span></span></div>
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<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;">I think another justification offered (it might have come up
elsewhere) was that as long as a contract was transparent there were no ethical
issues with offering that contract: the customer is free to accept or decline a
clearly presented contract. I am not sure of the ethical basis of this
approach, it seems to be rooted in “</span><a href="https://plato.stanford.edu/entries/egoism/"><span style="color: #0563c1; font-family: "arial" , "helvetica" , sans-serif;">ethical egoism</span></a><span style="font-family: "arial" , "helvetica" , sans-serif;">”, the view
that someone acting in their own self-interest is acting morally. This ethical
approach is associated with libertarian politics. If this is the ethical basis
then it would be incoherent with the apparent fact that insurers are being
paternalistic in determining who subsidises who. A general criticism of ethical
egoism is that people often do not know what is actually in their
“self-interest” for various reasons: is it long-term or short-term
self-interest; do individuals have the cognitive/psychological capability to
establish their self-interest; is their tacit coercion involved. </span></span></div>
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<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;">Whether or not the “transparency” argument can be justified
ethically, that is rationally, is a moot point since there is legal principle
in English law that a person must have “</span><a href="https://en.wikipedia.org/wiki/Capacity_in_English_law"><span style="color: #0563c1; font-family: "arial" , "helvetica" , sans-serif;">capacity</span></a><span style="font-family: "arial" , "helvetica" , sans-serif;">” to
enter a contract. In US law, “capacity” is assumed if the contractor is old
enough, it is not so clear in English law. This issue played a part in the PPI
mis-selling scandal and is reflected in the change to the Actuaries’ Code 6.4 </span></span></div>
<blockquote class="tr_bq">
<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;">Where Members identify that a user
of their work has, or is reasonably likely to have, misunderstood or
misinterpreted the information or advice provided by them in a way which could
have a material impact, Members should draw the user’s attention to this.</span></span></blockquote>
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<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;">
There is a lot of judgement involved in “has, or is
reasonably likely to have, misunderstood or misinterpreted the information”.
The requirement is not simply that the terms are clear and transparent in the
eyes of a well-educated actuary, the “reasonably likely” clause is open to
interpretation and a court is likely to regard what is “clear” to a
well-educated actuary might not be clear to their client.</span></span><br />
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<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;">Returning to the case under discussion, I observed that
while it might appear to conform to some consequentialist or deontological
ethical frameworks it did appear to be “unfair”. The concept of “fairness” is
closely related to the third major ethical framework: character or virtue
ethics.</span></span></div>
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<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;">Aristotle is usually recognised as the key proponent of
virtue ethics. I explained his approach was based on the idea that everything
has an “ends” or purpose. This apples to inanimate physical objects, the
purpose of a chair is to support a sitting person; different chairs have
different specific purposes (dining, arm, desk, …). “Virtues” lead to the
successful attainment of the purpose. Aristotle argued that the purpose of
humans was <i style="mso-bidi-font-style: normal;">eudaimonia</i>, often
translated as “happiness” though I think “equilibrium” is better. The Greeks
identified the four cardinal virtues: prudence (wisdom), courage (fortitude)
and temperance (decorum) and to clarify I pointed out that the three central
characters of the Harry Potter novels represented these three core virtues. </span></span></div>
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<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;">The fourth Greek virtue is justice. In this context, justice
is seen as the virtue (quality) of a functionally differentiated system that
enables the system to work well (to achieve its purpose). For example, a
functioning computer system can be seen as possessing the virtue of justice.
Justice is the virtue of a community that enables different people to work well
together to deliver a well-functioning society. Just as truth-telling and
promise-keeping are essential to justice, the well running of a society,
reciprocity, or fairness, is essential to all but the most primitive societies.
The significance of reciprocity only emerges </span><a href="https://www.oxfordscholarship.com/view/10.1093/0199262055.001.0001/acprof-9780199262052"><span style="color: #0563c1; font-family: "arial" , "helvetica" , sans-serif;">in
societies based on commercial exchange</span></a><span style="font-family: "arial" , "helvetica" , sans-serif;">, reinforcing the idea that ethical
norms are socially constructed in order to support the coherence of that
society. A significant proportion of my research is concerned with
understanding </span><a href="https://www.palgrave.com/gb/book/9783319610382"><span style="color: #0563c1; font-family: "arial" , "helvetica" , sans-serif;">how the
ethical norm of reciprocity is embedded in financial economics</span></a><span style="font-family: "arial" , "helvetica" , sans-serif;">.</span></span></div>
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<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;">Having reviewed the different ethical frameworks I spoke a
bit about “public interests”. I feel this was rather weak/irrelevant in the
context. My aim was to introduce the idea that Adam Smith “created” capitalism
by suggesting that “passions” (private interests) and “interests” (public interests)
could be balance in monetary terms. This is the ethical justification of the
modern financial imperative to maximise expected utility (of money).</span></span></div>
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<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;">Following this presentation the following case was
introduced</span></span></div>
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<ul><span style="font-family: "calibri";">
<li><div style="margin: 0in 0in 8pt;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">You are asked to price a new product</span></div>
</li>
<li><div style="margin: 0in 0in 8pt;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">This will be provided on a wholesale, net priced
basis to your distribution partner</span></div>
</li>
<li><div style="margin: 0in 0in 8pt;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">Although the product is expected to generate
very few claims, the consumer perception of risk is much greater than this</span></div>
</li>
<li><div style="margin: 0in 0in 8pt;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">Your distribution partner is therefore expecting
to sell the product for a very high mark up.</span></div>
</li>
<li><div style="margin: 0in 0in 8pt;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">They are also happy for you to set a relatively
conservative initial net price for the product, as long as there is a 100%
profit commission to the distributor once you have made your agreed margi</span></div>
</li>
</span></ul>
</div>
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<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;">A comment about this case was along the lines that all
companies “mark up” and the example of the </span><a href="https://www.thisismoney.co.uk/money/bills/article-1677114/Great-razor-rip-off-Gillettes-4750-mark-up.html"><span style="color: #0563c1; font-family: "arial" , "helvetica" , sans-serif;">mark-up
on men’s razors</span></a><span style="font-family: "arial" , "helvetica" , sans-serif;"> was offered. I thought about this comment for a while, the
reason I did this was considering whether a full response would be possible in
the time available. I decided it would not have been but I can outline the
issues here.</span></span></div>
<div style="margin: 0in 0in 8pt;">
<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;">Firstly, I believe there is a false equivalence, in general,
between selling razors and providing insurance. My evidence for this is in the
fact that actuaries are licensed professionals, where as razor manufacturers
are not. There are two aspects to this. Licensing, or regulating, professions means
that those engaged in the profession must demonstrate technical skills and meet
standards of behaviour. In compensation, licensing limits competition and so
they can charge premium rates. Economic libertarians (see before) are
fundamentally opposed to licensing on the basis that there should be a free
market in goods and services. To assert that there is an equivalence between
being an actuary and razor manufacturer/retailer misses this point and the fact
that actuaries’ fees are already inflated: charging high mark-ups could be seen
</span><a href="https://en.wikipedia.org/wiki/Rent-seeking"><span style="color: #0563c1; font-family: "arial" , "helvetica" , sans-serif;">rent seeking</span></a><span style="font-family: "arial" , "helvetica" , sans-serif;">. </span></span></div>
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<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;">Secondly, as can be deduced by my appearance, razors are not
a necessity where as I am required to take out insurance if I wish to drive or
borrow money. This would suggest that mark-ups in insurance contravene Kant’s
injunction to treat people as ends not means. Therefore, I do not think it is tenable
to justify high mark-ups in insurance on the basis of high mark-ups on the
basis of razors.</span></span></div>
<div style="margin: 0in 0in 8pt;">
<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;">Passing over the specifics of the comment there is the issue
as to whether it is legitimate to “take more than what is given”, for a
commercial transaction not to conform to the norm of reciprocity or “fairness
in exchange”. The ethical justification for charging high mark-ups is the main
moral imperative of economics: to maximise profit. This is rooted in a
synthesis of Mill’s utilitarianism: right action is the action that produces
the greatest good to the greatest number, synthesised with Smith’s claim that wealth
can measure “passions” and “interests”. There are significant philosophical issues
with both these supporting principles and this economic imperative is losing
its influence, though I recognise I am in a </span><a href="https://www.youtube.com/watch?v=D0tRSDQ2wAI?t=4705"><span style="color: #0563c1; font-family: "arial" , "helvetica" , sans-serif;">minority</span></a><span style="font-family: "arial" , "helvetica" , sans-serif;"> of those
sympathetic to finance in rejecting this imperative (in favour of the norm of
reciprocity).</span></span></div>
<div style="margin: 0in 0in 8pt;">
<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;">From the early 1950s the profit maximisation principle was
established in English case law in </span><a href="https://en.wikipedia.org/wiki/Buttle_v_Saunders"><span style="color: #0563c1; font-family: "arial" , "helvetica" , sans-serif;">Buttle v Saunders</span></a><span style="font-family: "arial" , "helvetica" , sans-serif;">,
where it was ruled that profit maximisation superseded any concept of “commercial
morality”. This case was later employed to prevent the National Union of Miners
investing the miners pension fund in support of miners “political”, rather than
financial, interests (Cowan v Scargill). This century, concerns over the
ability of investment funds to invest “ethically”, and divest in hydrocarbons,
for example, led to a re-think and there is </span><a href="https://s3-eu-west-2.amazonaws.com/lawcom-prod-storage-11jsxou24uy7q/uploads/2015/03/lc350_fiduciary_duties.pdf"><span style="color: #0563c1; font-family: "arial" , "helvetica" , sans-serif;">widespread
doubt</span></a><span style="font-family: "arial" , "helvetica" , sans-serif;"> today that “profit maximisation” is the economic imperative in finance.</span></span><br />
<span style="font-family: "calibri";"><br /></span>
<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;">An actuary might well argue that arguing against the ethical legitimacy of mark-ups is utopian and impractical. However, there is good evidence to support the belief that not imposing mark-ups is fundamental to sound finance. The evidence is in the practice of "dual quoting", simultaneously giving bid and ask prices without knowing which position the counterparty will take. This was the basis of jobbing the London markets for centuries. Dual quoting imposes sincerity on jobbers; they are unable to set high mark-ups without them being clearly obvious in a wide spread. A razor retailer could not impose a 4000% mark-up if they were required to simultaneously quote a price at which they would buy razors. This might seem rather absurd, but there is evidence that Quaker retailers would "dual quote" as part of their commitment to "honest dealing". It is worth noting that the influence on global finance and English commerce of a small number of Quakers is profound: <a href="http://www.quakersintheworld.org/quakers-in-action/327/Barclays-Bank-and-its-Quaker-roots">Barclays</a>, <a href="https://www.lloydsbankinggroup.com/Our-Group/our-heritage/2015-our-milestone-year/250-years-of-lloyds-bank/life-at-lloyds-bank/quaker-connections/">Lloyds</a>, <a href="https://en.wikipedia.org/wiki/Edwin_Waterhouse">Waterhouse</a>, Friends Provident, Boots, Clarks and the British industrial revolution was built on the Quaker <a href="https://en.wikipedia.org/wiki/Abraham_Darby_I">Coalbrookdale Iron Company</a> and <a href="https://en.wikipedia.org/wiki/Edward_Pease_(railway_pioneer)">Stockton & Darlington Railway</a>. Being honest in pricing seems to promote persistence in business.</span></span><br />
<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span>
<span style="font-family: "arial" , "helvetica" , sans-serif;">Dual quoting has a mathematical relevance. Modern subjectivist approaches to statistics, including Bayesian methods, were initially justified using the example of dual quoting by Frank Ramsey, the "<a href="https://plato.stanford.edu/entries/dutch-book/#DutcBookArguReveInco">Dutch Book Argument</a>". </span></span></div>
<div style="margin: 0in 0in 8pt;">
<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;">The point I went on to make is that ethics is fundamentally
concerned with questioning one’s behaviours. In this sense it is as “</span><a href="https://en.wikipedia.org/wiki/Pragmatic_ethics"><span style="color: #0563c1; font-family: "arial" , "helvetica" , sans-serif;">scientific</span></a><span style="font-family: "arial" , "helvetica" , sans-serif;">” as physics,
which questions phenomena in the physical world rather than the social. Ethical
norms are nothing more, or less, than the norms that ensure a particular
society “works”.</span></span></div>
<div style="margin: 0in 0in 8pt;">
<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;">On this basis, I finished my presentation by drawing links
between ethics and risk management. I pointed out that the three pillars of
Basel II corresponded to the three main ethical frameworks (Minimum capital
requirements are deontological rules; Supervisory review relates to the
character of the firm; Market discipline is concerned with consequences). I
also described the failure of LTCM and the success of J.P. Morgan through the
Credit Crisis in terms of ethics.</span></span></div>
<div style="margin: 0in 0in 8pt;">
<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;">The failure of </span><a href="https://magic-maths-money.blogspot.com/2013/08/lady-credit.html#LTCM"><span style="color: #0563c1; font-family: "arial" , "helvetica" , sans-serif;">LTCM</span></a><span style="font-family: "arial" , "helvetica" , sans-serif;">
is widely understood as being a consequence of reckless trading. Donald
MacKenzie has a different explanation that suggests the firm’s failure was more
to do with their social isolation, rooted in their success and consequent envy
of others. Their downfall was precipitated by the poor drafting of a fax and a
lack of support when beliefs about their solvency started to spread. The
success of </span><a href="https://magic-maths-money.blogspot.com/2011/07/history-repeating-itself.html#FG"><span style="color: #0563c1; font-family: "arial" , "helvetica" , sans-serif;">J.P.
Morgan</span></a><span style="font-family: "arial" , "helvetica" , sans-serif;"> through the Credit Crisis was based on the fact that they questioned
assumptions of prices their models produced, this self-examination is
fundamentally ethical.</span></span><br />
<span style="font-family: "calibri";"><br /></span></div>
<iframe allow="accelerometer; autoplay; encrypted-media; gyroscope; picture-in-picture" allowfullscreen="" frameborder="0" height="385" src="https://www.youtube.com/embed/hn1VxaMEjRU?t=48" width="684"></iframe><span style="font-family: "calibri";">
</span><br />
<div style="margin: 0in 0in 8pt;">
<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;">These closing remarks were designed to emphasise the practical
and serious utility of ethical behaviour. Ethics can be viewed as vacuous
philosophical introspection irrelevant to daily life, or mundane cases that address
clear situations. Ethics comes into its own when people work out what
behaviours will prove beneficial in their daily lives.</span></span></div>
<div style="margin: 0in 0in 8pt;">
<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif; font-size: small;">Plato argued it was impossible to be knowingly un-ethical,
bad behaviour was a consequence of ignorance. Pushing this, and the line taken
by Aristotle and Kant, unethical behaviour is always a consequence of people
not thinking about their behaviour. The problem with ethics, and all social, as
opposed to physical, phenomena, is that the rules of the game are fluid. Most
of the audience in the workshop would have been taught that profit maximisation
was the moral imperative, and on this basis they offered the comments
presented. A problem will develop if society shifts its consensus away from
profit maximisation and towards social cohesion, and so actuaries become
isolated from the society they inhabit. This is a risk management problem and
mirrors the type of situation investment managers face: will the fundamentals change.
It is, and should be, a responsibility of the IFoA to horizon scan these shifts
and reflect them in its approach to professionalism. I perceive changes in the
Actuaries’ Code, such as in regard to Communication, being a response to this
foresight. If actuaries, or finance in general, become disconnected from
society they will find their support network, potentially including their
status as a licensed profession, evaporating, just as LTCM saw their status as “masters
of the universe” disappear. This is why ethics are important.</span></span><br />
<span style="font-family: "calibri";"><br /></span>
<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif; font-size: small;">P.S. One participant commented that the workshop had been Euro-centric. This is true for the following reasons. Time did not allow me to point out links between European and Chinese philosophical approaches. Actuarial science is a product of European thought, if an actuaries employed techniques that had emerged out of Buddhist societies the workshop would have placed greater emphasis on Buddhist ethics. To try and apply Buddhist ethics to Euro-centric actuarial practices is going to be tough. </span></span></div>
</div>
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</div>
</div>
<span style="font-family: "calibri";">
</span><span style="font-size: large;"></span>Tim Johnsonhttp://www.blogger.com/profile/06952723922503939504noreply@blogger.com0tag:blogger.com,1999:blog-3046071861494986299.post-90499712001605574322019-04-05T07:12:00.003-07:002019-04-05T07:12:33.811-07:00Mathematician, heal thyselfI attended the second “Ethics in Mathematics” conference held at the University of Cambridge and organised by Maurice Chiodo. I had come across Maurice about twelve months ago when I was working with a Norwegian academic on the issue of ethics in maths. Maurice has developed into the Henry Oldenburg or Maurice Fréchet, though I suspect being a central node in a network is not as career enhancing for Maurice as it was for Oldenburg and Fréchet because the concern is ethics. In my experience mathematicians don’t really want to face up to ethical issues associated with their discipline.<br />
<br />
Ethics in mathematics is a broad issue, and Maurice’s interests extend well beyond my focus. For example, there are significant issues of professional ethics (diversity of the profession; treatment of junior academics); incorporating ethics into the curricula (school, undergraduate, postgraduate) as well as the “ethical content” of mathematics and the use of mathematics in society (my interests).<br />
<br />
The first hurdle in talking about ethics in mathematics is to clarify what is being talked about. Generally, “ethical behaviour” is taken to mean being “good”. But this does not stand up to examination since it is usually impossible to define what is being meant by good, for example the Mitchell and Webb sketch that has become an internet meme of David Mitchel as an SS officer asking the question “Maybe we’re the bad guys?” Socrates addressed the problem and saw a solution in being self-reflective: the SS officer asking the question is the start of ethics. Too often, the assumption is “I am a good person, therefore what I think is ethical”, all too often this results in people calling each other fascists.<br />
<br />
I frequently <a href="https://magic-maths-money.blogspot.com/2011/07/history-repeating-itself.html">refer to Gillian Tett’s <i>Fools’ Gold</i></a> as an account of ethical mathematical practice. Tett explains how J.P. Morgan came out of the 2008-2009 Financial Crisis because it used mathematics critically rather than blindly accepting the outputs of “black boxes”. I felt the approach Tett described was oddly discordant with the attitude of mathematicians. During the crisis, <a href="https://magic-maths-money.blogspot.com/2009/06/maths-and-markets-ii.html">I co-ordinated a response</a> from UK mathematicians, through the Council of Mathematical Sciences, to criticism of the use of mathematics in finance, this information was also passed onto the UK Science Minister of the time.<br />
<br />
The standard response from (senior) UK mathematicians was along the lines that finance hadn’t used mathematics but abused it. The solution was to have “more” and “better” mathematicians. This was underpinned by some adopting a logical positivist line, attributed to Hume, that the role of mathematicians is to describe the world as it is, not as it ought to be. At the time I felt mathematicians were not examining the role of their discipline in the crisis; they were not behaving ethically. This was the start of my journey that transformed me from an “uncritical” (unethical?) mathematician to someone who feels mathematics is vital, so long as it is critical.<br />
<br />
I was reminded of my experience in 2009-2010 at the conference when Maurice highlighted that of the hundreds of Cambridge maths faculty, only the two or three involved in organising the meeting were listening to the talks: UK mathematics (as distinct from statistics) seems disinterested in ethics, it does not wish to be critical. After making this observation, the session was on “Calling out bad mathematics”. There were two talks, on by Sam Marsh on issues with the valuation of UK academics’ valuation and the second about the use contemporary use of mathematics in support of “neo-eugenics” (“contemporary” because there is a long history of this). I had to come home and so was unable to participate in the discussion and what follows are the comments I would have made.<br />
<br />
During the workshop I had made the point not to demonise finance, it is not intrinsically unethical (see the example in <i>Fools’ Gold</i>) though I did not comment in a discussion about funding sources that governments are rarely benign. I would have made this point in respect to Sam Marsh’s presentation. The pensions dispute is generally framed as academics (unionised workers) against the Universities Superannuation Scheme (agents of the bosses). What was pointed out to me by academic actuaries early on in the dispute was that the “gold plated” academic pension was doomed not because of the employers but because the UK Government’s “Pensions Regulator” was running a campaign to close these types of pensions because they were high risk if the sponsoring company failed. Academics do not tend to think universities will fail financially, the government takes a different view. As a result, the pension is not as sound, looking forward, as it appears. My question to Dr Marsh would have been “Where did the boss of the USS work before the USS”. The answer is, <a href="https://www.moneymarketing.co.uk/pensions-regulator-chief-exec-bill-galvin-quits/">the Pensions Regulator</a>. My point is, there was more in the USS valuation than the mathematics, the USS were enacting policy principles from the Pensions Regulator (a government agency), not necessarily the employers. This highlights that governments are not always paragons of virtue.<br />
<br />
Clement Mouhout’s presentation highlighted the “abuse” of mathematics in support of eugenics. Mouhout categorised three types of “bad maths”: not being internally rigorous (not being valid); wrong application of axiomatic method (I interpret this as correct logic but incorrect premises); “math-science washing” (the area I am interest in). After I had left, a report on the discussion was
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<blockquote class="twitter-tweet" data-lang="en">
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Also really like Mouhot's response to a question about what if some actual legit mathematics happens to validate or be useful to awful ideas/people. Answer: it's not a real hypothetical; to the extent it's validating awful things it is not a legit result of math. <a href="https://twitter.com/hashtag/EiM2?src=hash&ref_src=twsrc%5Etfw">#EiM2</a></div>
— Michael J. Barany (@MBarany) <a href="https://twitter.com/MBarany/status/1113855267932987397?ref_src=twsrc%5Etfw">April 4, 2019</a></blockquote>
<script async="" charset="utf-8" src="https://platform.twitter.com/widgets.js"></script>
In the sense that mathematics cannot legitimate untrue theories, I agree. I am more concerned if the claim is mathematics cannot support “unpalatable” ideas. My concern is an issue I have with the use of mathematics to support left-wing ideology, not just right-wing ideology. My battle calling out mathematics was about <a href="https://magic-maths-money.blogspot.com/2013/01/why-some-physicists-shouldnt-do-finance.html">a theory criticising finance</a>. I have asked the authors to explain a <i>saltus</i> in their mathematical argument; their response was it has bee peer reviewed and they do not have to explain to me. I note this author/correspondent was on the editorial board of the journal who published the paper. Mathematics is unconcerned with politics, in this sense.<br />
<br />
One issue that came out of Marsh's presentation and resonated with me was that people recognise the authority of mathematics and people will generally listen to mathematicians more than sociologists. Dr Marsh's experience, and confusion around the fact that the USS were unperturbed my criticism by mathematicians of mathematical ideas is that, while they might listen to mathematicians they might be more inclined to take notice of social scientists. I think this is a real ethical, in the sense that it relates to the "ethos", problem for mathematics: mathematics is authoritative, but widely irrelevant. The theories are rigorous, but vacuous.<br />
<br />
This isn't a new issue, related to the widespread ignorance of expertise. In Feller's influential paper <a href="https://projecteuclid.org/download/pdf_1/euclid.bsmsp/1166219215"><i>On the Theory of Stochastic Processes, with Particular Reference to Applications</i> </a>there is a rather innocuous discussion of the Pareto's law of wealth distribution (p 418). The Pareto Law is sometimes used to justify inequality (in a similar manner to mathematical models of race/sex being used to justify inequality) and is colloquially the "80-20" rule: 80% of wealth is held by 20% of the population. Feller raises the question whether the rule is valid in non-ergodic situations. This is substantive as it implies the 80-20 rule need not always hold, it is not natural. Economists do not worry about this mathematical concern.<br />
<br />
What is the problem? I think the starting point is that mathematics is neutral, just as a rifle is neutral. There are a proportion of the population who believe mathematics is intrinsically evil (because it enables inhumane instrumental reasoning) just as there are a proportion who believe all firearms are intrinsically evil. There are those who feel that mathematics is intrinsically good, just as there are those who feel the solution to mass shootings is wider gun ownership. I tend to think mathematics is neither good nor evil but the use of mathematics an be ethical or unethical, just as a rifle can be used ethically or not. Mathematics is ethical if it is being used critically, meaning that those using it are being self-reflective in what they do. <a href="https://magic-maths-money.blogspot.com/2015/06/finance-and-mathematics-where-is.html">Mathematics is not ethical if it is being used instrumentally</a>, that is used as a means to a pre-defined ends (justifying risky investments, closing pension schemes, eugenics, restraining finance).<br />
<br />
Moreover, mathematicians need to articulate this and then take steps to be listened to in serious policy discussions. Politicians don't listen to mathematicians because mathematicians (as scientists) <a href="https://magic-maths-money.blogspot.com/2013/01/science-politics-mathematics-and-finance.html">tell the politicians that their work is not political</a>. This is a lie<span style="-webkit-text-stroke-width: 0px; background-color: white; color: black; display: inline !important; float: none; font-family: Times New Roman; font-size: 16px; font-style: normal; font-variant: normal; font-weight: 400; letter-spacing: normal; orphans: 2; text-align: left; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">, mathematics is constantly being used to justify political ends,</span> and a useless lie, in that it means mathematicians are not taken notice of by politicians when they challenge the instrumental use of mathematics.Tim Johnsonhttp://www.blogger.com/profile/06952723922503939504noreply@blogger.com0tag:blogger.com,1999:blog-3046071861494986299.post-26304086076014451882018-05-31T06:39:00.001-07:002018-05-31T06:39:17.897-07:00Anti-Semitism is the socialism of fools<div class="OutlineElement Ltr SCXW251393042" style="direction: ltr;">
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<span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">This post is my response to the warning from the former</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> </span></span><a class="Hyperlink SCXW251393042" href="https://www.bbc.co.uk/programmes/p064w9dz" rel="noreferrer" style="color: inherit; text-decoration: none;" target="_blank"><span class="TextRun Underlined SCXW251393042" lang="EN-GB" style="color: #0563c1; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px; text-decoration: underline;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Chief Rabbi Lord Jonathan Sacks of the dangers of "doing nothing" to combat anti-Semitism</span></span></a><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">.</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> The concern raised by Lord Sacks is that anti-Semitism appears widespread in the </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">far </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">left, as well as in its normal home in the </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">far </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">right</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">.
I will write about what I think I understand, meaning I will not
venture into the issues relating to actions of the state of Israel. None
of my </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">best friends</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">
(that I know of) are Jewish though I have yet to meet an Israeli Jew
who whole-heartedly supports the actions of the Israeli government. </span></span><span class="EOP SCXW251393042" data-ccp-props="{"335559739":200}" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"> </span></div>
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<div class="Paragraph SCXW251393042" style="background-color: transparent; color: windowtext; font-style: normal; font-weight: normal; margin-left: 0px; margin-right: 0px; padding-left: 0px; padding-right: 0px; text-align: left; text-indent: 0px; vertical-align: baseline;">
<span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">The quote, ‘</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Anti-Semitism is the socialism of fools</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">’ is often attributed to the nineteenth century German social democratic leader, </span></span><a class="Hyperlink SCXW251393042" href="https://en.wikipedia.org/wiki/August_Bebel" rel="noreferrer" style="color: inherit; text-decoration: none;" target="_blank"><span class="TextRun Underlined SCXW251393042" lang="EN-GB" style="color: #0563c1; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px; text-decoration: underline;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">August Bebel</span></span></a><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">. </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Its</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> switching, to ‘Socialism is the anti-Semitism of </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">intellectuals’,</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> seems to capture the essence of the problem the far left have. Those that support gender equality</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">
and oppose Islamophobia or racism based on skin colour seem not to
perceive anti-Semitism as a form of racism. This is relevant to me, as
someone who is interested in the relationship between ethics, finance
and mathematics</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> because Semitism appears to represent something other </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">ethnicity or </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">culture that is related to money.</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> </span></span><span class="EOP SCXW251393042" data-ccp-props="{"335559739":200}" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"> </span></div>
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<div class="Paragraph SCXW251393042" style="background-color: transparent; color: windowtext; font-style: normal; font-weight: normal; margin-left: 0px; margin-right: 0px; padding-left: 0px; padding-right: 0px; text-align: left; text-indent: 0px; vertical-align: baseline;">
<span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Marx, like many leading socialists between 1850 and 1950, came from a Jewish </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">roots</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">. </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Marx’s
parents came from rabbinical families with his paternal ancestry
providing the rabbi’s of Trier. Marx’s father converted to Protestantism
</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">probably to</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> enhance his career as a lawyer</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> in the aftermath of secularising Enlightenment</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">. </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Despite
being raised a Christian and becoming an atheist in maturity, Marx is
sometimes presented as an archetypal Yeshiva scholar. Marx developed
theories based on written materials – “I am a machine condemned to
devour books</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">”. </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">His research involved searching through works to find </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">episodes in history to support his ideas, he never sought to objectively asses them or formulate</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> a hypothesis to be tested empirically. </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">This approach mirrored </span></span><a class="Hyperlink SCXW251393042" href="https://en.wikipedia.org/wiki/Lurianic_Kabbalah" rel="noreferrer" style="color: inherit; text-decoration: none;" target="_blank"><span class="TextRun Underlined SCXW251393042" lang="EN-GB" style="color: #0563c1; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px; text-decoration: underline;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Lurianic kabbalah</span></span></a><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">, a form of Jewish mysticism that places </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">messianism</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> at its heart. The most famous (or notorious) Lurianic prophet was </span></span><a class="Hyperlink SCXW251393042" href="https://en.wikipedia.org/wiki/Nathan_of_Gaza" rel="noreferrer" style="color: inherit; text-decoration: none;" target="_blank"><span class="TextRun Underlined SCXW251393042" lang="EN-GB" style="color: #0563c1; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px; text-decoration: underline;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Nathan of Gaza</span></span></a><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">, who promoted </span></span><a class="Hyperlink SCXW251393042" href="https://en.wikipedia.org/wiki/Sabbatai_Zevi" rel="noreferrer" style="color: inherit; text-decoration: none;" target="_blank"><span class="TextRun Underlined SCXW251393042" lang="EN-GB" style="color: #0563c1; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px; text-decoration: underline;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Sabbatai</span></span><span class="TextRun Underlined SCXW251393042" lang="EN-GB" style="color: #0563c1; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px; text-decoration: underline;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> </span></span><span class="TextRun Underlined SCXW251393042" lang="EN-GB" style="color: #0563c1; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px; text-decoration: underline;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Zevi</span></span></a><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> as the messiah.</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> Nathan, who had been born around 1643, came across </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Zevi</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> in Jerusalem and proclaimed him messiah in 1665. This was when </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">western</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">
Europe was in the grip of millenarianism and Lurianic kabbalah had
superseded more rational Jewish approaches and the existence of a new
messiah in Jerusalem was widely accepted. Nathan, more intelligent than
the unstable </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Zevi</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">,
was able to develop predictions and explanations of events that seemed
plausible but were vague enough to explain inconvenient facts. Even when
</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Zevi</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">
converted to Islam to receive a pension from the Ottoman emperor,
Nathan was able to justify the unfortunate turn of events as coherent
with </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Zevi</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> being the Jewish messiah.</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> As well as adopting the method of the rabbinical scholar, Marx, like his cousin </span></span><a class="Hyperlink SCXW251393042" href="https://en.wikipedia.org/wiki/Heinrich_Heine" rel="noreferrer" style="color: inherit; text-decoration: none;" target="_blank"><span class="TextRun Underlined SCXW251393042" lang="EN-GB" style="color: #0563c1; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px; text-decoration: underline;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Henrich</span></span><span class="TextRun Underlined SCXW251393042" lang="EN-GB" style="color: #0563c1; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px; text-decoration: underline;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> Heine</span></span></a><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">, developed the lifestyle of the Jewish theologian. </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Judaism had survived persecution for centuries </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">as</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> a stateless religion run by</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> an oligarchy comprising of rich merchants who supported rabbis. Marx adopted the role of the rabbi, </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; font-style: italic; line-height: 21px;"><span class="SpellingError SCXW251393042" style="background-color: inherit;">schnorr</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="SpellingError SCXW251393042" style="background-color: inherit;">ing</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> off wealthy relatives </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">and acquaintances </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">to </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">ensure</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> his intellectual endeavours</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> could be free from being contaminated by practical experience</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">. </span></span><span class="EOP SCXW251393042" data-ccp-props="{"335559739":200}" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"> </span></div>
<div class="Paragraph SCXW251393042" style="background-color: transparent; color: windowtext; font-style: normal; font-weight: normal; margin-left: 0px; margin-right: 0px; padding-left: 0px; padding-right: 0px; text-align: left; text-indent: 0px; vertical-align: baseline;">
<br /></div>
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<div class="Paragraph SCXW251393042" style="background-color: transparent; color: windowtext; font-style: normal; font-weight: normal; margin-left: 0px; margin-right: 0px; padding-left: 0px; padding-right: 0px; text-align: left; text-indent: 0px; vertical-align: baseline;">
<span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Marx is widely regarded as being an anti-Semite. The basis is an essay Marx wrote in 1844, </span></span><a class="Hyperlink SCXW251393042" href="https://www.marxists.org/archive/marx/works/1844/jewish-question/" rel="noreferrer" style="color: inherit; text-decoration: none;" target="_blank"><span class="TextRun Underlined SCXW251393042" lang="EN-GB" style="color: #0563c1; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; font-style: italic; line-height: 21px; text-decoration: underline;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">On the Jewish Question</span></span></a><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">, </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">which </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">was</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; font-style: italic; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">developed while Marx was formulating historical materialism. Marx makes the following argument</span></span><span class="EOP SCXW251393042" data-ccp-props="{"335559739":200}" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"> </span></div>
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<div class="OutlineElement Ltr SCXW251393042" style="direction: ltr;">
<div class="Paragraph SCXW251393042" style="background-color: transparent; color: black; font-style: normal; font-weight: normal; margin-left: 48px; margin-right: 48px; padding-left: 0px; padding-right: 0px; text-align: left; text-indent: 0px; vertical-align: baseline;">
<span class="TextRun SCXW251393042" lang="EN-GB" style="color: black; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Let us consider the actual, worldly Jew – not the Sabbath Jew, as Ba</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="color: black; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">uer does, but the everyday Jew.</span></span><span class="EOP SCXW251393042" data-ccp-props="{"335559685":720,"335559737":720,"335559739":200}" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"> </span></div>
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<div class="Paragraph SCXW251393042" style="background-color: transparent; color: black; font-style: normal; font-weight: normal; margin-left: 48px; margin-right: 48px; padding-left: 0px; padding-right: 0px; text-align: left; text-indent: 0px; vertical-align: baseline;">
<span class="TextRun SCXW251393042" lang="EN-GB" style="color: black; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Let us not look for the secret of the Jew in his religion, but let us look for the secret o</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="color: black; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">f his religion in the real Jew.</span></span><span class="EOP SCXW251393042" data-ccp-props="{"335559685":720,"335559737":720,"335559739":200}" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"> </span></div>
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<div class="OutlineElement Ltr SCXW251393042" style="direction: ltr;">
<div class="Paragraph SCXW251393042" style="background-color: transparent; color: black; font-style: normal; font-weight: normal; margin-left: 48px; margin-right: 48px; padding-left: 0px; padding-right: 0px; text-align: left; text-indent: 0px; vertical-align: baseline;">
<span class="TextRun SCXW251393042" lang="EN-GB" style="color: black; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">What is the secular basis of Judaism? </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="color: black; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Practical need, self-interest.</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="color: black; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> What is the worldly religion of the Jew? </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="color: black; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Huckstering.</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="color: black; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> What is h</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="color: black; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">is worldly God? </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="color: black; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Money.</span></span><span class="EOP SCXW251393042" data-ccp-props="{"335559685":720,"335559737":720,"335559739":200}" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"> </span></div>
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<div class="Paragraph SCXW251393042" style="background-color: transparent; color: black; font-style: normal; font-weight: normal; margin-left: 48px; margin-right: 48px; padding-left: 0px; padding-right: 0px; text-align: left; text-indent: 0px; vertical-align: baseline;">
<span class="TextRun SCXW251393042" lang="EN-GB" style="color: black; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">...</span></span><span class="EOP SCXW251393042" data-ccp-props="{"335559685":720,"335559737":720,"335559739":200}" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"> </span></div>
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<div class="Paragraph SCXW251393042" style="background-color: transparent; color: black; font-style: normal; font-weight: normal; margin-left: 48px; margin-right: 48px; padding-left: 0px; padding-right: 0px; text-align: left; text-indent: 0px; vertical-align: baseline;">
<span class="TextRun SCXW251393042" lang="EN-GB" style="color: black; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">The
Jew has emancipated himself in a Jewish manner, not only because he has
acquired financial power, but also because, through him and also apart
from him, money has become a world power and the practical Jewish spirit
has become the practical spirit of the Christian nations. The Jews have
emancipated themselves insofar as t</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="color: black; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">he Christians have become Jews.</span></span><span class="EOP SCXW251393042" data-ccp-props="{"335559685":720,"335559737":720,"335559739":200}" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"> </span></div>
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<div class="Paragraph SCXW251393042" style="background-color: transparent; color: black; font-style: normal; font-weight: normal; margin-left: 48px; margin-right: 48px; padding-left: 0px; padding-right: 0px; text-align: left; text-indent: 0px; vertical-align: baseline;">
<span class="TextRun SCXW251393042" lang="EN-GB" style="color: black; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">...</span></span><span class="EOP SCXW251393042" data-ccp-props="{"335559685":720,"335559737":720,"335559739":200}" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"> </span></div>
</div>
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<div class="Paragraph SCXW251393042" style="background-color: transparent; color: black; font-style: normal; font-weight: normal; margin-left: 48px; margin-right: 48px; padding-left: 0px; padding-right: 0px; text-align: left; text-indent: 0px; vertical-align: baseline;">
<span class="TextRun SCXW251393042" lang="EN-GB" style="color: black; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">In the final analysis, the emancipation of the Jews is the emancipation of mankind from Judaism</span></span><span class="EOP SCXW251393042" data-ccp-props="{"335559685":720,"335559737":720,"335559739":200}" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"> </span></div>
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<div class="Paragraph SCXW251393042" style="background-color: transparent; color: windowtext; font-style: normal; font-weight: normal; margin-left: 0px; margin-right: 0px; padding-left: 0px; padding-right: 0px; text-align: left; text-indent: 0px; vertical-align: baseline;">
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<div class="Paragraph SCXW251393042" style="background-color: transparent; color: windowtext; font-style: normal; font-weight: normal; margin-left: 0px; margin-right: 0px; padding-left: 0px; padding-right: 0px; text-align: left; text-indent: 0px; vertical-align: baseline;">
<span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Marx’s
argument is not that Judaism creates ‘hucksters’ but that ‘hucksters’
creates Jews. The ‘material conditions’ of commerce creates the religion
of the Jews. By turning Christians into pedallers, the Jew converts
them. So long as ‘capitalism’ exists, the Jews will flourish.</span></span><span class="EOP SCXW251393042" data-ccp-props="{"335559739":200}" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"> </span></div>
<div class="Paragraph SCXW251393042" style="background-color: transparent; color: windowtext; font-style: normal; font-weight: normal; margin-left: 0px; margin-right: 0px; padding-left: 0px; padding-right: 0px; text-align: left; text-indent: 0px; vertical-align: baseline;">
<br /></div>
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<div class="Paragraph SCXW251393042" style="background-color: transparent; color: windowtext; font-style: normal; font-weight: normal; margin-left: 0px; margin-right: 0px; padding-left: 0px; padding-right: 0px; text-align: left; text-indent: 0px; vertical-align: baseline;">
<span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Marx did not confine his anti-Semitism to economic theory. He corresponded to </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="SpellingError SCXW251393042" style="background-color: inherit;">Engles</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> about a leading German socialist, </span></span><a class="Hyperlink SCXW251393042" href="https://en.wikipedia.org/wiki/Ferdinand_Lassalle" rel="noreferrer" style="color: inherit; text-decoration: none;" target="_blank"><span class="TextRun Underlined SCXW251393042" lang="EN-GB" style="color: #0563c1; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px; text-decoration: underline;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Ferdinand La</span></span><span class="TextRun Underlined SCXW251393042" lang="EN-GB" style="color: #0563c1; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px; text-decoration: underline;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">s</span></span><span class="TextRun Underlined SCXW251393042" lang="EN-GB" style="color: #0563c1; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px; text-decoration: underline;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">s</span></span><span class="TextRun Underlined SCXW251393042" lang="EN-GB" style="color: #0563c1; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px; text-decoration: underline;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">a</span></span><span class="TextRun Underlined SCXW251393042" lang="EN-GB" style="color: #0563c1; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px; text-decoration: underline;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">lle</span></span></a><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">, who was Jewish. Marx called Lassalle a “Jewish Nigger”. In 1861 Marx wrote to </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="SpellingError SCXW251393042" style="background-color: inherit;">Engles</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> </span></span><span class="EOP SCXW251393042" data-ccp-props="{"335559739":200}" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"> </span></div>
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<div class="Paragraph SCXW251393042" style="background-color: transparent; color: black; font-style: normal; font-weight: normal; margin-left: 48px; margin-right: 48px; padding-left: 0px; padding-right: 0px; text-align: left; text-indent: 0px; vertical-align: baseline;">
<span class="TextRun SCXW251393042" lang="EN-GB" style="color: black; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">A </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="color: black; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="SpellingError SCXW251393042" style="background-color: inherit;">propos</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="color: black; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> Lassalle-Lazarus.</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="color: black; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="color: black; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="SpellingError SCXW251393042" style="background-color: inherit;">Lepius</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="color: black; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">
in his great work on Egypt has proved that the exodus of the Jews from
Egypt was nothing but … the expulsion of the “leprous people” from
Egypt. At the head of these lepers was an Egyptian priest, Moses, </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="color: black; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="SpellingError SCXW251393042" style="background-color: inherit;">Lazurus</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="color: black; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">, the leper, is then the archetype of the Jew and Lassalle is the typical leper.</span></span><span class="EOP SCXW251393042" data-ccp-props="{"335559685":720,"335559737":720,"335559739":200}" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"> </span></div>
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<div class="Paragraph SCXW251393042" style="background-color: transparent; color: windowtext; font-style: normal; font-weight: normal; margin-left: 0px; margin-right: 0px; padding-left: 0px; padding-right: 0px; text-align: left; text-indent: 0px; vertical-align: baseline;">
<span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">A year later, referring to Lassalle</span></span><span class="EOP SCXW251393042" data-ccp-props="{"335559739":200}" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"> </span></div>
</div>
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<div class="Paragraph SCXW251393042" style="background-color: transparent; color: black; font-style: normal; font-weight: normal; margin-left: 48px; margin-right: 48px; padding-left: 0px; padding-right: 0px; text-align: left; text-indent: 0px; vertical-align: baseline;">
<span class="TextRun SCXW251393042" lang="EN-GB" style="color: black; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">It
is now perfectly clear to me that, as the shape of his head and the
growth of his hair indicates, he is descended from the Negroes who
joined in Moses’ flight from Egypt (unless his mother or grandmother on
his father’s side was crossed with a nigger). This union of Jew and
German on a Negro base was bound to produce an extraordinary hybrid.</span></span><span class="EOP SCXW251393042" data-ccp-props="{"335559685":720,"335559737":720,"335559739":200}" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"> </span></div>
</div>
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<div class="Paragraph SCXW251393042" style="background-color: transparent; color: windowtext; font-style: normal; font-weight: normal; margin-left: 0px; margin-right: 0px; padding-left: 0px; padding-right: 0px; text-align: left; text-indent: 0px; vertical-align: baseline;">
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<div class="Paragraph SCXW251393042" style="background-color: transparent; color: windowtext; font-style: normal; font-weight: normal; margin-left: 0px; margin-right: 0px; padding-left: 0px; padding-right: 0px; text-align: left; text-indent: 0px; vertical-align: baseline;">
<span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">The
problem the far left has with Judaism is almost hard-wired in. The Jew
is the archetype of the capitalist; destroy capitalism and Judaism
disappears. Marx secularises anti-Semitism into anti-capitalism. </span></span><span class="EOP SCXW251393042" data-ccp-props="{"335559739":200}" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;">Here-in lies the problem the far left has with anti-Semitism.</span></div>
<div class="Paragraph SCXW251393042" style="background-color: transparent; color: windowtext; font-style: normal; font-weight: normal; margin-left: 0px; margin-right: 0px; padding-left: 0px; padding-right: 0px; text-align: left; text-indent: 0px; vertical-align: baseline;">
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<div class="Paragraph SCXW251393042" style="background-color: transparent; color: windowtext; font-style: normal; font-weight: normal; margin-left: 0px; margin-right: 0px; padding-left: 0px; padding-right: 0px; text-align: left; text-indent: 0px; vertical-align: baseline;">
<span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Lenin often used the phrase “</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Anti-Semitism is the socialism of fools</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">” and </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">based</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> </span></span><a class="Hyperlink SCXW251393042" href="https://en.wikipedia.org/wiki/Imperialism,_the_Highest_Stage_of_Capitalism" rel="noreferrer" style="color: inherit; text-decoration: none;" target="_blank"><span class="TextRun Underlined SCXW251393042" lang="EN-GB" style="color: #0563c1; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; font-style: italic; line-height: 21px; text-decoration: underline;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Imperialism: the highest stage of capitalism</span></span></a><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">on a book, </span></span><a class="Hyperlink SCXW251393042" href="https://en.wikipedia.org/wiki/Imperialism_%28Hobson%29" rel="noreferrer" style="color: inherit; text-decoration: none;" target="_blank"><span class="TextRun Underlined SCXW251393042" lang="EN-GB" style="color: #0563c1; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; font-style: italic; line-height: 21px; text-decoration: underline;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Imperialism</span></span></a><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">, by</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> the British socialist, </span></span><a class="Hyperlink SCXW251393042" href="https://en.wikipedia.org/wiki/John_A._Hobson" rel="noreferrer" style="color: inherit; text-decoration: none;" target="_blank"><span class="TextRun Underlined SCXW251393042" lang="EN-GB" style="color: #0563c1; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px; text-decoration: underline;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">John Hobson</span></span></a><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">. </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Th</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> genesis of Hobson’s ideas came when he went to report on the </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; font-style: italic; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Boer War</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> for the </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; font-style: italic; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Manchester Guardian</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">. In </span></span><a class="Hyperlink SCXW251393042" href="https://archive.org/details/warinsouthafrica00hobsuoft" rel="noreferrer" style="color: inherit; text-decoration: none;" target="_blank"><span class="TextRun Underlined SCXW251393042" lang="EN-GB" style="color: #0563c1; font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; font-style: italic; line-height: 21px; text-decoration: underline;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">The War in South Africa: Its Causes and Effects</span></span></a><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">, Hobson blames “a small group of international financiers, chiefly German in origin and Jewish by race”</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> (p 189 ff.)</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">.</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> On this Marxist basis, the roots of imperialism are identified in the </span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">Rothschilds</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">. </span></span><span class="EOP SCXW251393042" data-ccp-props="{"335559739":200}" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><br /></span></div>
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<div class="Paragraph SCXW251393042" style="background-color: transparent; color: windowtext; font-style: normal; font-weight: normal; margin-left: 0px; margin-right: 0px; padding-left: 0px; padding-right: 0px; text-align: left; text-indent: 0px; vertical-align: baseline;">
<span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">To
the poor anti-Semite, the Jew is the banker pulling the strings that
control capitalism and the world. To the rich, the Jew is the poor
beggar selling shoddy goods that undercut their own</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">. Jews are</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;"> caricatures,</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">
never people. Anti-Semitism, since the Jewish emancipation, has
revolved around negative aspects to commerce and finance. This is why it
</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">affects</span></span><span class="TextRun SCXW251393042" lang="EN-GB" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"><span class="NormalTextRun SCXW251393042" style="background-color: inherit;">
me, since understanding finance requires that people do not approach it
from a perspective blind with prejudice. More generally, anti-Semitism
affects the Muslim and Afro-Caribbean because it is the prototype on which all (western) racism is formed.</span></span><span class="EOP SCXW251393042" data-ccp-props="{"335559739":200}" style="font-family: Arial,Arial_MSFontService,sans-serif; font-size: 11pt; line-height: 21px;"> </span></div>
</div>
Tim Johnsonhttp://www.blogger.com/profile/06952723922503939504noreply@blogger.com0tag:blogger.com,1999:blog-3046071861494986299.post-16506640853000762312018-03-20T04:02:00.001-07:002018-03-20T04:24:33.452-07:00The Golden RuleThere are two versions of the Golden Rule. The standard is “
<a href="https://en.wikipedia.org/wiki/Golden_Rule#Christianity"><span style="color: #0563c1;">Do to others what
you want them to do to you</span></a>” and appears in most developed religions.
Colloquially it is “Those that have the gold, make the rules”.<br />
<br />
<div>
<span style="font-size: small;">Someone raised this distinction on my work in financial
ethics by asking “Are you saying participants in financial markets should be
benevolent in how they price instruments?” They answer rhetorically with the
observation that the reality is that the markets are motivated by greed and
fear with leading market participants acting in a ‘brutish’ manner that
motivates the rest to conform. On this basis, ethics needs to be ‘<a href="https://en.wikipedia.org/wiki/Realpolitik#Political_realism_in_international_relations">realistic</a>’
in referencing the ‘facts on the ground’ and accommodate human nature. Faced
with this reality, you can try to ensure the regulator is of good character (‘superiorly
prudent’ to use Adam Smith’s language) and might be able to improve the
functioning of markets.</span></div>
<br />
<br />
<div>
<span style="font-size: small;">My correspondent referred me to the <a href="https://en.wikipedia.org/wiki/Siege_of_Melos#The_Melian_Dialogue"><span style="color: #0563c1;">Menian
Dialogue</span></a> in Thucydides <i style="mso-bidi-font-style: normal;"><a href="https://en.wikipedia.org/wiki/History_of_the_Peloponnesian_War"><span style="color: #0563c1;">History
of the Peloponnesian War</span></a></i> as an example of ‘realism’.</span></div>
<br />
<span style="font-size: small;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><iframe allow="autoplay; encrypted-media" allowfullscreen="" frameborder="0" height="315" src="https://www.youtube.com/embed/PNzHOqjMHwY?rel=0" width="560"></iframe></span></span>
<br />
<div>
This was interesting to me. While I don’t know the full
context and Thucydides’ intent, I am confident that there is a widely held view
that the behaviour of the Athenian negotiators was an example of <a href="https://en.wikipedia.org/wiki/Hubris"><span style="color: #0563c1;">hubris</span></a>; the Menian negotiator even
notes that the gods would be on their side. The subsequent defeat of Athens was
therefore <a href="https://en.wikipedia.org/wiki/Nemesis_(mythology)"><span style="color: #0563c1;">nemesis</span></a>.
My justification was that hubris/nemesis was a central theme of Greek classical
culture along with the idea that a human can never be so sure as to be certain.
The Athenian’s were confident that they could sack Menos without fear of
reprisal; they were wrong, and I understand the Athenians surrendered to Sparta
because they were concerned about the precedent they had set at Menos. Note
that there is an important financial connection: the term Romans used for
interest was <i><a href="http://www.theoi.com/Daimon/Poine.html"><span style="color: #0563c1;">poine</span></a></i> the spirit that
accompanies Nemesis. </div>
<br />
<br />
<div>
A related topic is this Stoic problem:</div>
<br />
<br />
<div>
<span style="font-size: small;">A grain merchant from Alexandria arrives at Rhodes,
which is gripped by famine.<span style="mso-spacerun: yes;"> </span>The merchant
knows that other merchants are following him with plentiful supplies of grain,
though the town’s inhabitants do not know this.<span style="mso-spacerun: yes;">
</span>How should the merchant price the grain he has?<span style="mso-spacerun: yes;"> </span></span></div>
<span style="font-size: small;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span></span>
<br />
<div>
Cicero, in <i style="mso-bidi-font-style: normal;">De Officiis</i>,
had argued that the merchant should charge a lower price based on the knowledge
of the coming relief. Thomas Aquinas disagreed; the merchant may think that
there are more grain shipments on the way, but they do not know. Hence the
‘reality’ of the market prices in Rhodes could be employed. The Franciscans
took a different approach, Pierre Jean Olivi, argued that the metaphysical
probability of more grain arriving in Rhodes, had a certain reality, which
Aquinas was ignoring by focusing on the ‘physical’ reality of the prices being
offered in the market. Olivi observed that</div>
<br />
<br />
<div>
The judgement of the value of a thing in exchange
seldom or never can be made except through conjecture or probable opinion, and
not so precisely, or as if understood and measured by one invisible point, but
rather as a fitting latitude within which the diverse judgements of men will
differ in estimation. </div>
<br />
<br />
<div>
Olivi realised that market exchange was about equating
expectations, not accepting concrete valuations agreed by property owners.<span style="mso-spacerun: yes;"> </span>This was a major development over the
Pythagorean approach of fixing the relationship between an object and a number.<span style="mso-spacerun: yes;"> </span>Olivi regarded uncertain events ‒ such as
more grain deliveries, lost ships, or defaults on debts ‒ as influencing prices
and so fair exchange had to be based on the sharing and interpretation of
information.<span style="mso-spacerun: yes;"> </span>This meant that chance
could be quantified, and there is a consensus that this observation is the
genesis of the idea of mathematical probability. </div>
<br />
<br />
<div>
Changing tack a bit to the issue of ‘power’. I have recently
been looking at <i style="mso-bidi-font-style: normal;">Beowulf</i>. <i style="mso-bidi-font-style: normal;">Beowulf</i> is a rare example of
pre-Christian northern European myth and raises the question, why did it
survive? One explanation is that it highlighted the transitory nature of human
power and so was useful story that Christian missionaries could use in
emphasising the transcendent nature of divine power. The Norse myth of <i style="mso-bidi-font-style: normal;">Ragnarok</i> has similarly survived and
similarly describes the temporality of power (the ‘<i style="mso-bidi-font-style: normal;"><a href="https://en.wikipedia.org/wiki/Ragnar%C3%B6k#Muspille,_Heliand,_and_Christianity"><span style="color: #0563c1;">Muspille</span></a></i>’
interpretation). There is a similar structure in the relationship between the <i style="mso-bidi-font-style: normal;">Illiad</i> and <i style="mso-bidi-font-style: normal;">Odyssey</i>. Anger, honour and power motivate the <i style="mso-bidi-font-style: normal;">Illiad</i> whereas Odysseus personifies intelligence (cunning) and a
desire to return to domesticity. To me, all these myths emphasise that society
has to evolve away from one based the ‘reality of power’ to one based on the
application of intelligence. The pragmatic explanation is that a society based
on rational reflection and discourse is better able to respond to uncertainty;
this is why democratic societies thrive.</div>
<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span>
<br />
<div>
These thoughts develop something I touch upon in my <a href="https://www.amazon.co.uk/Ethics-Quantitative-Finance-Pragmatic-Financial/dp/3319610384"><span style="color: #0563c1;">book</span></a>
is that there is a train of thought linking Thucydides, Hobbes, Descartes,
Spinoza and through to Nietzsche and Schmidt that focuses on the reality of
power that I reject. The problem, as I see it, is finance is fundamentally
concerned with uncertainty. This means that one day you might clearly perceive
what is in your best interests (Athens' subjugation of Melos) but you
misunderstood, resulting in catastrophe. This is the pragmatic line, which
emerged with Pierce's rejection of Cartesian certainties that he saw at the
root of the US Civil War. Cheryl Misak's <a href="https://www.amazon.co.uk/Truth-Politics-Morality-Pragmatism-Deliberation/dp/0415140366"><span style="color: #0563c1;">Truth,
Politics and Morality</span></a> informs me that the antidote is deliberative and I
give a series of examples in my book about how (well functioning) markets
undermine power. On this basis, I take a pragmatic position on ethics, i.e.
culture is an environment in which practices that “work” evolve and these
become habituated (the approximate origin of the Greek root of ‘<a href="https://en.wikipedia.org/wiki/Ethics"><span style="color: #0563c1;">ethics</span></a>’, the Latin root of ‘<a href="https://en.wikipedia.org/wiki/Mores"><span style="color: #0563c1;">morals</span></a>’). For example, if a
society wants to grow its population, contraception and abortion become
immoral; if a society wants to limit population growth, they become legitimate.</div>
<br />
<br />
<div>
On the specific issue of benevolence, I introduce the idea
of charity in commerce through Shakespeare's <i style="mso-bidi-font-style: normal;">The Merchant of Venice</i>, which I present as an argument against
"iron laws" and in favour of "merciful judgement"; that is
don't trust the model but use judgement. I describe how British finance was
built on Quaker institutions that had charity/benevolence as a keystone and
there are numerous accounts of how they were able to prosper in a very
uncertain environment because they put great store in charity, reciprocity and
sincerity. Finally I describe the collapse of LTCM as being a consequence of a
lack of charity. LTCM believed it was impregnable (like Athens) and so did not
feel the need to act charitably. The account of their failure I use is they got
the structuring of a fax wrong ("We need more money because the markets
are in turmoil and there are lots of opportunities" instead of "There
are lots of opportunities because the market is in turmoil, do you want to
invest?") and in the resulting run they had no reliable friends.</div>
<br />
<br />
<div>
Financial crises, I believe, can be characterised as representing
a paradigm change, where an old ‘reality’ is replaced by a new reality. In
order to inhibit the development of crises, people need to be doubtful of their
circumstances and there need to be ways to allow opinions to change slowly
without a (mathematical) catastrophe. There is the example of how the powers
who created the Bretton Woods system could not conceive of the eclipsing of
British and French power by German and Japanese economic might in the 1960s. J.
P. Morgan doubted the profitability of CDO of MBS and so investigated the
apparent reality and survived the crisis of 2007-2009; I think J.P. Morgan was
like Odysseus where as Lehmans was more Achilles.</div>
<br />
<br />
<div>
In my book, I try and bring these themes together by
addressing the issue of voluntary slavery. Consequentialst/utilitarian ethics
cannot reject voluntary slavery coherently, and so cannot reject slavery. The
‘reality of power’ cannot reject slavery. Deontological ethics, like Kant’s,
can reject slavery. Pragmatic ethics rejects slavery on the basis that any
rational opinion might be valid in solving a problem/prompting a gradual change
in opinion. Since slaves are silenced from giving opinions, therefore slavery
cannot be tolerated. </div>
<br />
<br />
<div>
I believe my approach is coherent with Adam Smith, mainly
because Smith worked within the Aristotelean framework. In the <i style="mso-bidi-font-style: normal;"><a href="https://www.marxists.org/reference/archive/smith-adam/works/moral/part06/part6a.htm"><span style="color: #0563c1;">Theory
of Moral Sentiments</span></a></i> I note that Smith compares ‘prudence’ with ‘superior
prudence’ as</div>
<br />
<br />
<div>
Prudence, in short, when directed merely to the care of
the health, of the fortune, and of the rank and reputation of the individual,
though it is regarded as a most respectable and even, in some degree, as an
amiable and agreeable quality, yet it never is considered as one, either of the
most endearing, or of the most ennobling of the virtues. It commands a certain
cold esteem, but seems not entitled to any very ardent love or admiration. </div>
<br />
<br />
<div>
Wise and judicious conduct, when directed to greater
and nobler purposes than the care of the health, the fortune, the rank and
reputation of the individual, is frequently and very properly called prudence.
We talk of the prudence of the great general, of the great statesman, of the
great legislator. Prudence is, in all these cases, combined with many greater
and more splendid virtues, with valour, with extensive and strong benevolence,
with a sacred regard to the rules of justice, and all these supported by a
proper degree of self-command. This superior prudence, when carried to the
highest degree of perfection, necessarily supposes the art, the talent, and the
habit or disposition of acting with the most perfect propriety in every
possible circumstance and situation. It necessarily supposes the utmost
perfection of all the intellectual and of all the moral virtues. It is the best
head joined to the best heart. It is the most perfect wisdom combined with the
most perfect virtue. It constitutes very nearly the character of the Academical
or Peripatetic sage, as the inferior prudence does that of the Epicurean. </div>
<br />
<br />
<div>
For Aristotle, reciprocity was a
component of justice. Justice, itself, was, <a href="http://www.perseus.tufts.edu/hopper/text?doc=Perseus%3Atext%3A1999.01.0168%3Abook%3D4%3Asection%3D434a"><span style="color: #0563c1;">according
to Plato</span></a>, the virtue that ensures a functionally differentiated system,
such as a society, works well. Therefore, my treating markets as centres of
communicative action, governed by reciprocity, sincerity and charity, fits within
Smith’s framework of ‘superior prudence’ as well as classical conceptions of
the relationship between the polis and the individual, since the ideas are
rooted in classical theory. </div>
Tim Johnsonhttp://www.blogger.com/profile/06952723922503939504noreply@blogger.com0tag:blogger.com,1999:blog-3046071861494986299.post-35921492126809686892018-03-02T07:24:00.004-08:002018-03-02T07:29:31.148-08:00Mathematical Finance<br />
<div style="margin: 0px 0px 10.66px;">
<span style="margin: 0px;"><span style="font-family: "calibri";">I wrote this piece for the National Institute for Economic and Social Research's <i><a href="https://www.rebuildingmacroeconomics.ac.uk/mathematics-finance-ethics/" target="_blank">Rebuilding Macroeconomics</a></i> project.</span></span></div>
<div style="margin: 0px 0px 10.66px;">
<span style="margin: 0px;"><span style="font-family: "calibri";">There are
three types of mathematicians: those that can count and those that can’t. This
aphorism challenges the public perception of mathematics as being concerned
with calculation and is liked by mathematicians because it enables them to
highlight what mathematics is concerned with, which is identifying and
describing relationships between objects. </span></span></div>
<br />
<div style="margin: 0px 0px 10.66px;">
<span style="margin: 0px;"><span style="font-family: "calibri";">A more
sophisticated misunderstanding relates to the way mathematics is conducted. The
error originates in how mathematicians present their work, as starting with
definitions and assumptions from which ever more complex theorems are deduced.
This is the convention that Euclid established in his <i style="mso-bidi-font-style: normal;"><a href="http://magic-maths-money.blogspot.co.uk/2017/07/why-mathematics-has-not-been-effective.html" target="_blank">Elements of Geometry</a></i> and led Kant to believe that <i style="mso-bidi-font-style: normal;">synthetic</i> <i style="mso-bidi-font-style: normal;">a priori</i> knowledge was possible. Euclid actually started with
Pythagoras’ Theorem, and all the other geometric ‘rules’ that had emerged out
of practice, and broke them into their constituent parts until he identified
the elements of geometry. It was only having completed this analysis did he
then reconstruct geometry in a systematic way in <i style="mso-bidi-font-style: normal;">The Elements</i>. Today the consensus within mathematics is that the
discipline is <i style="mso-bidi-font-style: normal;">analytic</i>, from
observations, not <i style="mso-bidi-font-style: normal;">synthetic,</i> outside
of mathematics there persists a belief in the power of pure deductive, synthetic
<i style="mso-bidi-font-style: normal;">a priori</i> reasoning.</span></span></div>
<br />
<div style="margin: 0px 0px 10.66px;">
<span style="margin: 0px;"><span style="font-family: "calibri";">Physical
sciences are in tune with what mathematicians do. This is exemplified by Newton
who gathered observations on the planets and invented calculus to interpret the
data. On this basis he concluded that momentum was being conserved and deduced
the gravitational law. The key idea originating with Newton is that momentum is
an invariant in a dynamic system. This is understood most clearly when
presented using calculus, the mathematics Newton invented. Since Newton, all
significant advances in physics have been associated with the identification of
an invariant (momentum, energy, increase in entropy, speed of light) and inventing
clear and succinct ways of describing objects (mathematics) that re-presents
nature based on an invariant. </span></span></div>
<br />
<div style="margin: 0px 0px 10.66px;">
<span style="margin: 0px;"><span style="font-family: "calibri";">Finance has
developed a mathematical theory in the Fundamental Theorem of Asset Pricing
that has the same status in mathematical finance as Newton’s Laws have in
classical physics. The central principle, analogous to the conservation of momentum,
is that of ‘no-arbitrage’. The Fundamental Theorem of Asset Pricing states that
if an asset is priced on the principle of no-arbitrage then there is a
reciprocal relationship in the exchange. There are at least two ways of
understanding this principle. It is a version of Euclid’s ‘First Common Notion’:
if <i style="mso-bidi-font-style: normal;">A=B</i> and <i style="mso-bidi-font-style: normal;">C=B</i>, then <i style="mso-bidi-font-style: normal;">A=C</i>. Money
takes the role of “<i style="mso-bidi-font-style: normal;">B</i>” and arbitrates
the value of <i style="mso-bidi-font-style: normal;">A</i> relative to <i style="mso-bidi-font-style: normal;">C</i>. Alternatively, it is a version of the
scholastic argument that a riskless profit is a shameful gain (<i style="mso-bidi-font-style: normal;">turpe lucrum</i>). </span></span></div>
<br />
<div style="margin: 0px 0px 10.66px;">
<span style="margin: 0px;"><span style="font-family: "calibri";">The no-arbitrage
principle is justified through Ramsey’s ‘Dutch Book Argument’ that requires
markets are mediated by jobbers (market-makers or dealers in the US) rather
than brokers. When a jobber quotes a price, they do not know whether the
counter-party is looking to buy or sell at the price. The jobber will quote a
price at which they will buy and a higher price at which they will sell. They
signify confidence in their quote by having a narrow difference between the prices.
If a jobber quotes a price that another trader believes is wrong, the trader
will take the quote, immediately moving the market. These jobber-mediated
markets are, therefore, essentially discursive. Jobbers are engaged in making
assertions as to prices, which are challenged when others take the quote; this
is ‘market making’. If the market agrees that a jobber has correctly priced the
asset, no trading will take place - silence is consent - and the market
dissolves. </span></span></div>
<br />
<div style="margin: 0px 0px 10.66px;">
<span style="margin: 0px;"><span style="font-family: "calibri";"><a href="http://magic-maths-money.blogspot.co.uk/2016/01/sincerity-subjective-rationality-of.html" target="_blank">Jobbers</a> do
not hold assets and prefer trading in financial contracts rather than hold
physical assets, they have no commitment to the assets they trade and identify
themselves as taking long and short positions rather than buying or selling.
While they lack commitment to assets, jobbers must be sincere in their
statements, they must believe the quote is right. This means, that in the face
of radical uncertainty, a jobber’s price quote is reliable, it can be trusted. </span></span></div>
<br />
<div style="margin: 0px 0px 10.66px;">
<span style="margin: 0px;"><span style="font-family: "calibri";">The
significance of reciprocity in markets rests on the no-arbitrage principle that
can only be justified if exchange is being conducted by jobbers, who will buy
and sell at the quoted prices. Markets in economics tend to be based on brokers
who bring property owners, one a buyer, one a seller, together. The focus on
broker-mediated markets rather than jobber-mediated markets means that the
importance of reciprocity in exchange is obscured. The different emphasis is rooted
in financial markets being concerned with uncertain futures whereas economic
markets are concerned with immediate scarcities. </span></span></div>
<br />
<div style="margin: 0px 0px 10.66px;">
<span style="margin: 0px;"><span style="font-family: "calibri";">In modern
business, if a manufacturer can sell a product at an enormous profit, creating
an arbitrage, they are succeeding. Economic theory argues that in the presence
of these excess profits, competitors can come in and the price of the product
will fall. This appears to be no different to the situation in a
jobber-mediated market: jobbers will bid (buy) at the cost of production and offer
(sell) at that cost plus a risk premium, just as manufacturers will do in a
competitive broker-mediated market. However, while the ultimate point might be
the same for jobber and broker mediated markets, the routes to the point are
different. For jobbers, no-arbitrage, and hence reciprocity, are iron laws that
must not be breached, ever. In broker-mediated markets, arbitrages are
transitory and the ideal is to capture them before they disappear; it is a
virtue to break the principle of reciprocity. Prices at which exchange takes
place in jobber-mediated markets are always disputed prices, but sincere; in
broker-mediated markets, prices are always accepted, if not fair. </span></span></div>
<br />
<div style="margin: 0px 0px 10.66px;">
<span style="margin: 0px;"><span style="font-family: "calibri";">Consider some
thought experiments. If a manufacturer, making arbitrage profits, was obliged
to buy identical goods, manufactured by others, at the prices they themselves quoted,
would they quote the same price? If a slum-landlord had to live in the accommodation
they rented, would they rent inferior quality accommodation? Public services
are often expensive because they are of a quality that the providers would like
to receive. These examples highlight the ethical nature of dual-quoting, it
imposes the categorical imperative: do unto others as you would have them do
unto you.</span></span></div>
<br />
<div style="margin: 0px 0px 10.66px;">
<span style="margin: 0px;"><span style="font-family: "calibri";">Financial
instability has long been blamed on jobbers, who trade ‘paper’ and lack
commitment to material assets, they are 'disinterested'. However, bubbles are a consequence of property
owners ‘ramping’ assets and selling them above their intrinsic value. The
failure of Long Term Capital Management in 1997 was precipitated by an apparent
arbitrage, in the ‘asset swap’ strategy involving rock-solid US government
debt, being an illusion. The Credit Crisis was a result of investment banks
believing they could construct mortgage backed securities (MBS), out of ‘real’
assets, for less than their worth, not realising the inherent risks because
they believed in arbitrages. Investment banks have been fined for selling MBS
above their internally recognised value; they were being profit maximisers but
insincere. There is evidence that the ‘Bitcoin’ bubble of December 2017 was a
consequence of it being easy to buy Bitcoin, but difficult to sell; something
not possible in a jobber-mediated market. These are all situations where
financial instability originates in a belief that the no-arbitrage principle
could be ignored or that prices could be insincere, and so it was possible to earn
risk-less profits.</span></span></div>
<br />
<div style="margin: 0px 0px 10.66px;">
<span style="margin: 0px;"><span style="font-family: "calibri";">Recognising
that the no-arbitrage principle is analogous to Euclid’s First Common Notion
means that arbitrageurs should be regarded in the same way as promoters’
perpetual-motion-machines are: mis-guided cranks. It also emphasises that
exchange should be reciprocal, it should not involve profiting at another’s
expense. Mathematics only works on the basis of Euclid’s First Common Notion;
markets only work well on the basis of reciprocity.</span></span></div>
<b></b><i></i><u></u><sub></sub><sup></sup><strike></strike><span style="font-family: "calibri";"></span>Tim Johnsonhttp://www.blogger.com/profile/06952723922503939504noreply@blogger.com0tag:blogger.com,1999:blog-3046071861494986299.post-35470518736556043232017-08-07T06:21:00.000-07:002017-11-10T09:05:48.116-08:00Antifragility and justice<style type="text/css">p { margin-bottom: 0.25cm; direction: ltr; line-height: 120%; text-align: left; }a:link { color: rgb(0, 0, 255); }</style>
<br />
<div style="line-height: 115%; margin-bottom: 0.35cm;">
Towards the end
of last week I noticed a flotsam on my Twitter feed coming from a
storm involving NN Taleb and the prominent British classisist Prof
Beard. The origins were in a BBC schools <a href="http://www.bbc.co.uk/programmes/p01zfw4w">animation
</a>that depicted a Roman soldier as dark skinned. This elicited a
response on Infowars that the BBC was re-writing history. I was
interested in this because that week my family had driven down to the<a href="http://www.vindolanda.com/">
Vindolanda and Roman Army Museums</a> on Hadrian’s Wall and I had
been struck that a significant portion of the garrison at Vindolanda
came from Hama in Syria, a region familiar today as being a source of
refugees into Europe. <a href="https://medium.com/incerto/something-is-broken-in-the-uk-intellectual-sphere-7efc9a1f154a">Taleb
was attacking Beard for being part of the conspiracy</a>. Since the
evidence for Syrians at Vindolanda comes from <a href="https://en.wikipedia.org/wiki/Vindolanda_tablets">written
records discovered in the 1970s</a>, I cannot believe the ‘left’
are that competent at formulating such a clever consipiracy.<br />
<br />
<span style="font-size: x-small;">[PS there are links between Financial Mathematics and the mathematics of population genetics: <a href="https://link.springer.com/book/10.1007%2F978-3-642-16632-7" target="_blank">Alison Etheridge</a>
is prominent in both fields. My gut instinct was the apparent lack of
non-Caucasian genes in the current British population was not evidence
of their having been non-Caucasian Romans in Britain. @mpigliucci <a href="https://t.co/O8hQ8qKAXf" target="_blank">explains this</a> and highlights how Taleb is a victim of his own biases.]</span><br />
<br />
I was also
interested because Taleb was involved. Along with many academic
mathematicians working on finance I do not have a strong affinity
with Black Swan or Fooled by Randomness. The reason why is as
follows. Taleb, along with other ‘public’ financial
mathematicians like <a href="http://financeandsociety.ed.ac.uk/article/viewFile/1733/2220">Elie
Ayache</a> and <a href="http://magic-maths-money.blogspot.co.uk/2014/12/maths-and-morals-economics-and-greed.html">Doyne
Farmer</a>, were part of a cohort of applied mathematicians,
engineers and physicists who entered finance in the 1970s and 1980s,
were successful, became rich and have used that wealth to direct
public perceptions of financial mathematics. At the time, option
pricing was accomplished by solving partial differential equations
and these ‘quants’ had expertise rooted in dynamical –
deterministic – systems (note that Taleb’s mathematical PhD in Management Science was awarded in
1998, not before he went into Finance with an MBA). There is a sense
amongst most actuaries and financial mathematicians, trained in
probability theory, that Taleb’s books resonate with this audience
because the books highlight the significance of randomness, something
these people were not really educated in. As one senior British
actuary said to me: “What does Taleb think actuarial science has
been concerned with for 300 years if not Black Swans and not being
Fooled by Randomness”. This frustration reflects decades of
‘quants’ in banks regarding actuaries as being ponderous
dinosaurs.</div>
<div style="line-height: 115%; margin-bottom: 0.35cm;">
A profile
of Taleb by Malcolm Gladwell (who shares Taleb’s skill for
simplification) suggested that Taleb’s ideas are founded on his
experiences of the Lebanese civil war and surviving cancer. While
Taleb dismisses this I wonder if there is some truth in the theory.
Taleb is concerned with how people face up to uncertainty and how
they respond, discussed most recently in <a href="https://www.amazon.co.uk/Antifragile-Things-that-Gain-Disorder/dp/0141038225" target="_blank">Antifragile</a>. I share this
concern but have been dissatisfied with Taleb's arguments, in
particular I feel that Taleb <a href="http://magic-maths-money.blogspot.co.uk/2012/07/is-risk-intelligence-dangerous-concept.html">believes</a>,
like many of his colleagues, that there are individuals peculiarly
able to make judgements under uncertainty. This was part of the
motivation for writing <a href="http://www.palgrave.com/gb/book/9783319610382" target="_blank">Ethics in Quantitative Finance</a>.</div>
<div style="line-height: 115%; margin-bottom: 0.35cm;">
My reasoning is
based in mathematics, which is subtly different to Taleb's which just
uses mathematical symbolism. Consider a closed system of 100 agents,
each initially endowed with $45. Now, at each time step each agent
randomly gives another agent $1. What do you think the distribution
of money should be? The immediate thought might be the distribution
would remain uniform, with a little noise. However, this not the
case, as presented <a href="http://www.decisionsciencenews.com/2017/06/19/counterintuitive-problem-everyone-room-keeps-giving-dollars-random-others-youll-never-guess-happens-next/">in
a nice simulation</a>. Some people will end up with lots of money,
others will be bankrupted. The rich can become rich simply through
luck, not skill. This should not perturb the likes of NN Taleb or
<a href="https://en.wikipedia.org/wiki/Robert_Mercer_(businessman)">Robert
Mercer</a>, since the model does not consider how genius might skew
the distribution, extending the right tail at the expense of the
middle. It is more challenging to the 'left' who might seek to
implement policies that make the wealth distribution more uniform,
since such policies might be considered to be equivalent to pushing
water up hill.
</div>
<div style="line-height: 115%; margin-bottom: 0.35cm;">
Moving on, there
are some points that were made with respect to my last post about
maths in economics that are important in understanding my approach.
<a href="http://magic-maths-money.blogspot.com/2017/07/why-mathematics-has-not-been-effective.html?showComment=1501400109573#c3521568743337117699">One
comment</a> was that
</div>
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The more fatal weakness of this line of argument seems to me the
starting assumptions: mathematics involves "identifying how we
see relations between objects." That seems right, but left
undefined here is the term "objects." What exactly is an
object?<br />
<br />
In mathematics, an object is something we can
quantify. Now comes the problem: in economics, what we need to
identify is the relation between emotions (greed, fear of loss,
investor euphoria, etc.) and behavior (buying, selling, tolerance for
risk, and so forth).<br />
<br />
Alas, this requires that we
mathematize emotions. To my knowledge, no one has succeeded in doing
this in some 8,000 years of recorded history.</div>
<div align="left" style="background: transparent; line-height: 115%; margin-bottom: 0.35cm; orphans: 2; page-break-before: auto; widows: 2;">
I take a less pessimistic view. Plato split the soul into three
parts. The <i>epithymetikon</i> (‘from the heart’) was the part
of the soul concerned with carnal desires, sometimes represented as a
black horse. Alongside this was the <i>thymoeides</i> (‘spirit’)
and represented energy and the motivation to act, this was sometimes
represented as a white horse. The third component was the <i>logistikon</i>
(‘reason’, from logos the Greek for ‘what is said’) or nous
(‘mind’) that distinguishes right from wrong, which Plato
associated with the Athenian temperament. The <i>logistikon</i> was
sometimes represented as a charioteer controlling the other parts of
the soul, making sure that the spirit would not become dominated by
carnal desires, which would be wrong. Through the medieval period
these ideas became refined into one of balancing passions and
interests. This did not involve quantification, which is only a
small part of mathematics, but by identifying a balance point, which
involves measurement. Adam Smith's great contribution, <a href="http://press.princeton.edu/titles/10110.html">according
to Albert Hirschman</a>, was in enabling the quantification of
passions and interests through money, precipitating capitalism tied
up with utility maximisation. My argument in EQF is that part of the
long story of financial mathematics is concerned with this balancing
of passions and interests and this was considered to be a question of
Justice. This predates Smith's quantification of passions and
interests,. When mathematics was dominated by geometry, this was
considered in terms of proportions, but with monetisation came
arithmetic.
</div>
<div align="left" style="background: transparent; line-height: 115%; margin-bottom: 0.35cm; orphans: 2; widows: 2;">
Justice, according to Socrates and taken up by Plato and Aristotle
and their heirs, is the quality that a complex, functionally
differentiated system (a society) needs to enable it to work well.
On this basis a society is Just when it enables individuals, who all
have different capacities and capabilities, in the society to do
their best by allowing them to do what they are best at. This
relates to comments relating to the use of mathematics in economics
raises, that people are different and so cannot be reduced to a
mathematical representation (e.g. "The rigidity of mathematics
makes it difficult to fully capture the richness and complexity of
human behaviour "). This is true, however I highlight how
financial mathematics is founded on reciprocity which is a component
of Justice, and this is the fundamental invariant not just in
finance, social systems in general but across any functionally
differentiated system. The mathematics of the Fundamental Theorem of
Asset Pricing is not involved in quantification but is concerned with
ensuring Justice.</div>
<div align="left" style="background: transparent; line-height: 115%; margin-bottom: 0.35cm; orphans: 2; widows: 2;">
On the basis of this definition of Justice the universe is Just,
since it works well as a complex, functionally differentiated system.
It is concerned with different things being in the correct balance
and is different from the idea that justice is based on everything
being the same, which might be characterised as a 'left-wing'
approach.</div>
<div align="left" style="background: transparent; line-height: 115%; margin-bottom: 0.35cm; orphans: 2; widows: 2;">
Now we can return to Taleb's account of "Antifragility"
that starts with
</div>
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Antifragility is ... behind everything that has changed with time:
evolution, culture, ideas, revolutions, political systems,
technological innovation, cultural and economic success, corporate
survival, good recipes (say, chicken soup or steak tartare with a
drop of cognac), the rise of cities, cultures, legal systems,
equatorial forests, bacterial resistance … even our own existence
as a species on this planet. And antifragility determines the
boundary between what is living and organic (or complex), say, the
human body, and what is inert, say, a physical object like the
stapler on your desk.</div>
<div align="left" style="background: transparent; line-height: 115%; margin-bottom: 0.35cm; orphans: 2; page-break-before: auto; widows: 2;">
This excerpt immediately raises the question: what is the difference
between antifragility and Socrates' conception of Justice.
Critically I have removed part of the text, which actually begins</div>
<div align="left" style="background: transparent; line-height: 115%; margin-bottom: 0.35cm; margin-left: 1cm; margin-right: 0.9cm; orphans: 2; page-break-before: auto; widows: 2;">
Antifragility is beyond resilience or robustness. The resilient
resists shocks and stays the same; the antifragile gets better.</div>
<div align="left" style="background: transparent; line-height: 115%; margin-bottom: 0.35cm; orphans: 2; page-break-before: auto; widows: 2;">
Suggesting the antifragile is about improvement, but I don't think
this establishes any clear water with the ancient philosophers.
Furthermore the argument that the best antidote to fragility is "skin
in the game" is not so different from the Enlightenment
attitude, espoused from Locke to Kant, that only property owners
could participate in democratic politics. The issue here, and
dominated British politics for much of the nineteenth century, was
that this excluded the majority from participating in democracy.
Taleb's conclusion refers to the Golden Rule "Do to others what
you want them to do to you".</div>
<div align="left" style="background: transparent; line-height: 115%; margin-bottom: 0.35cm; orphans: 2; widows: 2;">
<a href="https://www.blogger.com/null" name="_GoBack"></a>
These observations suggest that Taleb's argument in Antifragile is
close to mine in <a href="http://www.palgrave.com/gb/book/9783319610382" target="_blank">EQF</a>. The difference is I focus on how the idea of
Justice is embedded in financial mathematics, why this is so and what
it implies. My conclusion is that in oredr to be able to manage
radically (Knightian/non-ergodic, etc.) uncertainty a broad range of
opinions need to be solicited and considered and so markets are
discursive arenas and must address truth, truthfulness and rightness.
Taleb suggests the essence of his book is "Everything gains or
loses from volatility. Fragility is what loses from volatility and
uncertainty." This seems a little trite to me, echoing the
actuary: "What has civilisation been worried about for 4,000
years?" The problem, as I see it , in Taleb's book is that he
leaves himself open criticisms captured in a <a href="http://www.tandfonline.com/doi/abs/10.2753/PKE0160-3477320403">paper</a>
by Andrea Terzi (in what I would class as a 'left-wing' journal).
The point Terzi makes is
</div>
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Taleb admits that the system cannot be made foolproof to BSE [Black
Swan events] but believes it can be made more resistant through some
form of economic and social Darwinism. His prescriptions include
consenting that what is fragile breaks early and never gets too big
to endanger the system should a BSE appear; letting economic players
who make errors be punished for their failures; not precluding
recessions from mopping up the system from the unfit to survival; and
not indulging in debt.</div>
<div align="left" style="background: transparent; line-height: 115%; margin-bottom: 0.35cm; orphans: 2; widows: 2;">
Taleb seems to have slipped into pseudo-Nietzschean philosophy that
distinguishes man and superman. He seems to identify with the
supermen and denigrates most scholars as 'imbeciles'. This view has
been supported in the evidence of responses supporting Taleb's attack
on Beard from, what look to me like, neo-Nazis. My concern is that I
feel the problems of finance, that Taleb purports to solve, are about
an obsession with identifying '<a href="http://magic-maths-money.blogspot.co.uk/2012/07/is-risk-intelligence-dangerous-concept.html">geniuses</a>'
at the expense of deliberation and doubt. </div>
<div align="left" style="background: transparent; line-height: 115%; margin-bottom: 0.35cm; orphans: 2; widows: 2;">
I am not allowing comments on this article as I anticipate they will be dominated alt-right abuse.</div>
Tim Johnsonhttp://www.blogger.com/profile/06952723922503939504noreply@blogger.com0tag:blogger.com,1999:blog-3046071861494986299.post-18675904219777920242017-07-27T04:27:00.000-07:002017-07-27T09:03:10.565-07:00Why mathematics has not been effective in economics<style type="text/css">p { margin-bottom: 0.25cm; line-height: 120%; }</style>
<br />
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;">There are three
types of mathematician: those who can count and those who can't.</span></div>
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;"><br /></span></div>
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;">It takes a few
seconds to get this joke the first time you hear it, and every once
and a while when I tell it to a class one student will raise a hand
and asked for the 'third type'. Its a good joke because it
challenges assumptions, here the assumption is that mathematics is
concerned with arithmetic, which is just a minor branch of number
theory.</span></div>
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;"><br /></span></div>
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;">At the end of June,
before I went on holiday, I had been thinking about the role of
mathematics in democracy. This was prompted by an invitation from a
Norwegian mathematician to do some work in the topic. I contacted
@BrendanLarvor asking who were the main scholars in the area. He
pointed me to a <a href="http://www.esri.mmu.ac.uk/mect3/papers_16/larvor.pdf" target="_blank">recent paper</a> that discusses a key issue. Many people
see the role of mathematics in democracy as educating the public so
that they can do their own calculations. Citizens are able to
calculate the cost/benefit of Brexit, for example. But calculation
is not what mathematics is concerned with. The paper is not an easy
read but highlights the awareness amongst (some) mathematicians that
mathematics is not straightforward. In particular the phrase "the
role of mathematics in formatting the world as we experience it"
resonated with me as being a key issue.</span></div>
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;"><br /></span></div>
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;">This led me to
think about the role of mathematics in defining how the disciplines
of finance and economics are arranged. A consequence of this was I
invited people to answer a short survey on "Does a mathematical
proof enhance a financial theory?". The survey was widely
distributed (via @MarkThoma amongst others) but only elicited seven
responses. The results are <a href="https://www.surveymonkey.com/results/SM-JHHYQZS6/" target="_blank">here</a> (the <a href="https://t.co/hwS4LQmFsW" target="_blank">survey</a> is still open, btw). I was disappointed that only seven
people seemed to share my interest to the degree that they would
spend a little time answering the question. I concluded that either
people were disinterested (possibly because they thought the question
was trivial, like "Does water flow downhill") or that they
did not understand the question (they do not feel confident about
what is meant by a 'mathematical theory').</span></div>
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;"><br /></span></div>
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;">On returning from
holiday, I noticed that @freakonometrics had retweeted an article
from aeon about how "By fetishising mathematical models,
economists turned economics into a highly paid pseudoscience" </span></div>
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;"><br /></span></div>
<blockquote class="twitter-tweet" data-lang="en">
<div dir="ltr" lang="en">
<span style="font-size: small;">"By fetishising mathematical models, economists turned economics into a highly paid pseudoscience" <a href="https://t.co/2ODpHZg1It">https://t.co/2ODpHZg1It</a> by <a href="https://twitter.com/Naseeoh">@Naseeoh</a></span></div>
<span style="font-size: small;">— Arthur Charpentier (@freakonometrics) <a href="https://twitter.com/freakonometrics/status/889422126427639808">July 24, 2017</a></span></blockquote>
<script async="" charset="utf-8" src="//platform.twitter.com/widgets.js"></script>
<br />
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;">and then @rethinkecon sent out this</span></div>
<blockquote class="twitter-tweet" data-lang="en">
<div dir="ltr" lang="und">
<span style="font-size: small;"><a href="https://t.co/hAcDZXJrQm">pic.twitter.com/hAcDZXJrQm</a></span></div>
<span style="font-size: small;">— Rethinking Economics (@rethinkecon) <a href="https://twitter.com/rethinkecon/status/890198015478255616">July 26, 2017</a></span></blockquote>
<script async="" charset="utf-8" src="//platform.twitter.com/widgets.js"></script>
<br />
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;">I have the opinion
that almost all of the criticism of the use of mathematics in
economics stems from a lack of understanding of what mathematics is,
reflecting a general ignorance in economics that has led to the
failure of mathematics in economics. To get an idea of my
frustration consider the following argument about journalism. One
might observe that there are many more photographs in newspapers
today than there were 100 or so years ago. Using the argument that
the problems of economics are in its use of mathematics is rather
like saying the problems of contemporary journalism is down to
photography.</span></div>
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;"><br /></span></div>
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;">The starting point
of understanding the role of mathematics in finance and economics is
to appreciate what mathematics is concerned with. Mathematics is
concerned with identifying relations between objects: bigger smaller,
to the left/right, symmetry, before/after and so forth. Top class
mathematical research is concerned with discovering new ways of
representing how things are related. More every-day research shows
that A=B or how you go from A to B. Once the mathematicians have
done their work, of "formatting the world as we experience it"
by identifying how we see relations between objects, others then get
on and do things. Mercator figured out how to make maps - a
mathematical operation - sailors then used the maps and in the
process forgot that what they were doing was using mathematics.</span></div>
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;"><br /></span></div>
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;">Mathematicians rely
on other disciplines providing problems, mathematics, whatever the
caricature of a mathematician dealing with abstract ideals will say.
Mathematics then figures out a way of looking at the problem - the
relations between its components - so that a solution can be found.
The caricature of the mathematician is explained by how mathematics
is presented. Rather than starting with the problem and then
breaking it down into its components, mathematics is presented back
to front. It starts with the components and then shows how these
combine to deliver the observed phenomena. This 'back-to-front'
approach originates in Euclid. The theorems at the end of Euclid's
<i>Elements</i> were all well known hundreds, if not thousands, of years
before he wrote <i>The Elements</i> around 300 BCE.
</span></div>
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;"><br /></span></div>
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;">Euclid's approach is
useful in that it identifies the essential elements of a theorem,
these elements can be the used to construct novel theorems by
combining them in innovative ways; think of a mathematical assumption
as a chemical element and a theorem as a useful molecule. However
there are a number of problems resulting from the way mathematics is
presented. One effect is encapsulated in Kant's argument that
synthetic a priori knowledge was possible. Kant used the example of
Euclid to argue that it was because he had assumed Euclid had deduced
the theorems from first principles. This is significant in that this
fallacious argument was a foundation of Kant's rejection of Hume's
claim that a necessary cause of an effect could never be identified.
Another effect is it provides a model for a powerful rhetorical form
that is persuasive, it was used in particular by Hobbes and Spinoza
while Aquinas' writing has been compared to mathematics. Today
'mathematical' proofs that 1=2 are commonplace. More significantly
this 'mathematical' approach was used by Hobbes to argue that if a
highwayman offered you the choice of 'your money or your life' and
you handed over your money, you were giving consent. It is not easy
to discern flaws in these 'mathematical' arguments, and this is the
day to day job of research mathematicians (a social scientists once
Tweeted they had had a productive day, reviewing three papers: as a
mathematician it will take me a week of hard graft to review a 10
page paper).</span></div>
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;"><br /></span></div>
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;">The effect in
economics is most clearly seen in Friedman's argument, in the
<i>Methodology of Positive Economics</i>, that the validity of an
economic theorem should not rest on the realism of its assumptions.
I will not dismiss Friedman as the arch-priest of neo-liberalism as I
think the argument he makes has some merits (he focuses on the
empirical outcome and would normally be regarded as 'anti
mathematiciastion'). The attitude he shares with most economists,
along with Kant, Hobbes and Spinoza, is that a 'mathematical'
argument flows from assumptions to conclusions. A mathematician
approach would be to try and tease out the correct assumptions from
the observed behaviour. I would prefer the problem to be re-cast as
"By fetishising synthetic <i>a priori</i> knowledge, economists
turned economics into a highly paid pseudoscience".</span></div>
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;"><br /></span></div>
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;">The next question is
why do economists do this. The answer is rooted in the observation
that the 'mathematical' approach is powerful rhetorically: you can
use it to convince everyone of almost anything, providing you can
make the chain of arguments tricky enough to follow. From a
philosophical perspective, Kant distinguished the ‘lower
faculties’, such as mathematics, that would consider matters of
pure reason independently of the concerns of the state from the
‘higher faculties’, engineering, jurisprudence, medicine and
theology, were concerned with matters of authority and would be
regulated and monitored by the state. If economics is mathematical
it should inform the state, not be directed by the state, if it is
not then it will have the same status (and funding) as theology (and,
one would suppose, other modern social and human sciences).</span></div>
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;"><br /></span></div>
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;">More practical
motivations were characterised by Frank Knight, who, around 1920, felt
that economics had split into two strands. There was a mathematical
science, which studied closed systems based on distorting
assumptions, and a descriptive science, which could deduce nothing.
Economics needed to take a middle path that was both realistic and
informative. However, before the Second World War, most economists
doubted the usefulness of mathematics in addressing problems
involving radical uncertainty and human volition, such as the
economy. These attitudes changed when it was seen that mathematics
had transformed how the war, a similarly uncertain and human
activity, had been fought; operations research, cryptography,
supporting the physics of radar and weapons. Based on this
experience and government faith in mathematics, economics began
presenting itself as a mathematical science after the war. Two
publications of 1944 led this transformation: <i>The Probability
Approach in Econometrics</i> by Trygve Håvelmo and <i>The Theory of
Games and Economic Behavior</i> by John von Neumann and Oskar
Morgenstern.</span></div>
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;"><br /></span></div>
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;">Håvelmo argued also
that if economics wanted to be taken as seriously as physics,
chemistry and biology, it needed to employ probability because that
was the way that opinions were expressed in science. He believed that
if this was done, economics would make new insights, just as
physicists and biologists had. He also observed that the natural
sciences had found a perspective on nature that made it appear to
follow stable laws. <i>The goal of The Probability Approach in
Econometrics</i> was to present how this could be realised.
Morgenstern began <i>The Theory of Games</i>, like Håvelmo, with an
argument for the use of mathematics in economics and explained that
what was required was the careful definition of terms, a
pre-requisite of mathematics but lacking in economics. To this end,
von Neumann started with the axioms of utility that had been at the
core of Carl Menger’s, unmathematical, economics.</span></div>
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;"><br /></span></div>
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;">When Håvelmo was
awarded the Nobel Prize for Economics in 1989 he reflected that his
aspirations for introducing mathematics to economics had not been
met. He identified the primary issue as being that the economic
models that ‘econometricians’ had been trying to apply to the
data were probably wrong. More fundamentally, economics never
generated new mathematics ‒ ways of seeing relationships ‒ in the
way that the physical sciences had stimulated developments in
mathematics. Economists had simply adapted concepts from other fields
to their own devices.</span></div>
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;"><br /></span></div>
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;">To my mind, Håvelmo
captures why mathematics is not unreasonable effective in economics.
It is because economists use mathematics as 'part of the plumbing', a
rhetorical tool to convince an audience of an argument. <a href="https://en.wikipedia.org/wiki/The_Unreasonable_Effectiveness_of_Mathematics_in_the_Natural_Sciences" target="_blank">The Unreasonable Effectiveness of Mathematics in the Natural Sciences</a> is
founded on the fact that the natural science use mathematics to
figure out relationships. The one exception to this rule (that I am
aware of) in modern economics is the Fundamental Theorem of Asset
Pricing, formulated by Harrison, Kreps and Pliska around 1980 (I
dismiss game theory as this was originated in the early 1700s). The
FTAP is analogous to the Mercator projection, it describes the basis
on which models (maps) are made that guide probationers (navigators).
“A market admits no arbitrage, if and only if, the market has a martingale measure” establishes
a relationship.
</span></div>
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;"><br /></span></div>
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;">Once mathematics has
delivered ways of identifying relations in physics, '<a href="https://en.wikipedia.org/wiki/Conservation_law" target="_blank">invariants</a>' can
be identified, such
as momentum, energy or the speed of light (<a href="https://en.wikipedia.org/wiki/Noether%27s_theorem" target="_blank">Noether's Theorem</a> is
critical here). Physical theories are then tested on the basis of
whether or not they adhere to a particular conservation law. Because
economics is disinterested in using mathematics to identify
relationships it has been unable to accomplish the next step of
discovering invariants. It has tried, notably by sometimes hoping
'money' is an economic invariant.
</span></div>
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;"><br /></span></div>
<div style="line-height: 100%; margin-bottom: 0cm;">
<span style="font-size: small;">In writing <a href="https://www.amazon.co.uk/Ethics-Quantitative-Finance-Pragmatic-Financial/dp/3319610384" target="_blank"><i>Ethics in Quantitative Finance</i></a> (the points made here are expanded upon in the book) one of my aims was to think of
finance as a mathematician. That is to consider the fundamental relationship, as expressed in the FTAP, and then think
about what this implies as to the fundamental invariant. My
conclusion was that reciprocity - and equality between what is given
and received - is the invariant and I explore why this might be so.
The hope is that finance and economics can actually achieve something
useful for the wider community.</span></div>
Tim Johnsonhttp://www.blogger.com/profile/06952723922503939504noreply@blogger.com8tag:blogger.com,1999:blog-3046071861494986299.post-24254413183660549692017-06-23T04:31:00.001-07:002017-06-23T05:05:38.797-07:00Political and Financial Crises: some connections between the Credit Crisis and the current crisis in UK politicsMy book, <a href="https://www.amazon.co.uk/Ethics-Quantitative-Finance-Pragmatic-Financial/dp/3319610384" target="_blank"><i>Ethics in Quantitative Finance</i></a>, was motivated by the wish to understand the relationship between mathematics and financial ethics in the aftermath of the Credit Crisis (GFC). While the GFC occured a decade ago, the topics discussed in Ethics in Quantitative Finance are still relevant today as the UK endures a "Great Political Crisis", a year after voting to leave the European Union. Had someone drawn a connection between mathematics, ethics and politics for me in 2006 I would have ignored them, suggesting that the scholarship underpinning the book is transformative.<br />
<br />
A fundamental insight made in the book is that when market-makers (jobbers or dealers) give a bid-ask quote, they are offering an opinion and so money is behaving as a language that carries that opinion in prices. On this basis, I employ Habermas' theory of communicative action and in this context the book describes how mathematics ensures the objective validity of a price by ensuring reciprocity, the dual quoting ensures sincerity and the truthfulness of the price while the social rightness is delivered by charity. I argue that these norms, truth, truthfulness and rightness, are developed in commercial practice and provide the basis for democratic discourse. That is, sound politics are a consequence of sound commerce and I provide examples in pre-Socratic Greece, the emergence of bourgeois communes in high medieval Europe and seventeenth century Britain and the Netherlands. I also highlight that there is a symbiotic relationship between finance and politics: sound finance delivers sound politics, sound politics deliver sound finance. Pre-Socratic Greeks understood that if there emerge wealth inequalities the political stability collapses but mathematics, by ensuring reciprocity, inhibits the emergence of inequality, and this is a theme returned to throughout the book.<br />
<br />
The idea that reciprocity is deeply embedded in financial economics was fully formed by around 2011 - the RCUK, the UK government's research administrators, identified the idea a sa "<a href="http://www.rcuk.ac.uk/documents/publications/bigideasforthefuturereport-pdf/" target="_blank">Big Idea for the Future</a>" seven years ago. Explaining the significance of reciprocity took longer and was undertaken as I experienced the <a href="https://en.wikipedia.org/wiki/Scottish_independence_referendum,_2014" target="_blank">Scottish Independence Referendum campaign</a> that lasterd from September 2013 until the vote in September 2014, the general election of 2015, the EU referendum campaign of 2016. The general election campaign of 2017 highlighted the connections between the GFC and the current political crisis.<br />
<br />
The Scottish Independence Referendum campaign was widely lauded (by English commentators) as a good example of public engagement in politics. As someone voting in the referendum I regarded it as a complete failure of politics. On one hand, the nationalists promised the electorate milk and honey in an independent Scotland, what became labelled a manifesto of hope. The unionists prophesied doom and destruction. In terms of parenting, one approach was to offer a child a toy to behave, the other was to threaten to take a way a toy if the child misbehaved. There was no actual discussion of what was the best policy, in terms of the metaphor t, the parents did not explain why they wanted the child to behave in a particular way.<br />
<br />
This was encapsulated in the debate about the <a href="https://en.wikipedia.org/wiki/Scottish_independence_referendum,_2014#Currency" target="_blank">currency</a> of an independent currency, and was the point on which I judged the validity of the arguments. Alex Salmond asserted that Scotland would use the UK pound, as the obvious alternative of adopting the Euro was unpopular. Unionists pointed out that Scotland would <a href="http://www.dailyrecord.co.uk/news/politics/gordon-brown-writes-exclusively-daily-2841667" target="_blank">never be independent</a> of England if it retained the UK pound. What annoyed me was the referendum campaign did not discuss the relationship between money and sovereignty they, and the unionists, simply made assertions as to an unknowable future in an attempt to accumulate votes.<br />
<br />
I understood the campaign in terms of a simple mathematical model of decision making under uncertainty that I <a href="http://magic-maths-money.blogspot.co.uk/2014/09/economics-ecology-and-ethics.html" target="_blank">often</a> describe. During a British winter, some birds need to eat up to 40% of their body weight to survive the night, and so their very existence depends on
making the right decisions about looking for food. Let's say a bird has
6 hours to find 9 berries and it has two choices:<br />
<br />
<ul>
<li>[Play it Safe] The bird stays where it is, where it knows there are
berries in the hope of finding a few. The chance of finding one or two
berries in the hour is 50:50.</li>
<li>[Take a Risk] The bird flies off, in the hope of finding
berry-bonanza but with a high chance of only finding enough to replace
the energy lost in flying. The energy cost of flying is one berry and
the chance of only finding the one berry in the new field is 5 in 6, but
there is a 1 in 6 chance of finding 10 worms (and getting an excess of
9).</li>
</ul>
Notice that the expectation of both strategies is the same,
one-and-a-half berries in an hour and so the bird can expect to get the
nine berries in the six hours. However the second approach is riskier
(for any concave utility function the expected utility of the second
strategy is always going to be less than the first). However, if the bird has only found five berries after five
hours, it is certain to die if it does not switch to the risky strategy,
where it has a small chance of finding the 10 berries that will ensure
survival. A similar argument applies if the bird has found more than 8
berries after 5 hours - it can afford to take a risk.<br />
<br />
The financial interpretation is that only the middle class should be
risk averse the rich can afford to gamble, the poor have nothing
(substantially) to lose by gambling but there is the small chance they
become rich. This is an explanation as to why the poor defy economic
'rationality' in buying lottery tickets, it is actually practically
reasonable. In <i>Ethics in Quantitative Finance</i> I suggest that the adoption of utility in the nineteenth century was motivated by the rich de-legitimising speculation by the poor, since the poor can become rich through speculation. Today, economists like to obscure this simple mathematical model under the veil of "prospect theory" or the S-shaped utility functions of Friedman & Savage.<br />
<br />
On this basis I understood the nationalists inviting the Scottish voters to take the risk while the unionists were conforming to neoclassical economic theory and arguing the risks were too great. Neither side was actually that interested in undertaking the political task of converging on a settled view of how Scotland should be governed. Three years on, nothing much has changed here.<br />
<br />
Three weeks ago, at the beginning of June, I had dinner with an old friend from my undergraduate studies who happens to be an external examiner for some of our MSc programmes. We had had a similar dinner last year in the run up to the EU referendum and this year's dinner took place a week before the 2017 general election. My friend's parents were immigrants from Cyprus and he dismissed the EU referendum as being indicative of the UK's xenophobia. I disagreed, and went further to argue that it was just such attitudes by the British 'professional' class that led to the Leave vote. I pointed out that, according the authoritative National Centre for Social Research, around 30% of Black and Asian voters voted to leave the EU while only 20% of the electorate as a whole regarded immigration as the main issue in the vote. If you look at data the Leave voters were predominantly those poor in property, income and education. The Leave campaign was identical to the Scottish nationalist campaign in promising milk and honey to the marginalised in a Brexit Britain: vote Leave, you have nothing to lose but might gain.<br />
<br />
The prime example was "An extra £350 million a week to the National Health Service", which appealed directly to the poor. In the aftermath of the EU referendum the professional classes, those who are going to be risk averse, began discussing living in a "post-truth" world were facts no longer play a role in peoples' decision making. The fact that these arguments ignore is that at there were no "matters of fact" pertaining to a post referendum Britain. The Remain campaign mimicked the unionist campaign by calculating, to the <a href="http://www.bbc.co.uk/news/uk-politics-eu-referendum-36073201" target="_blank">nearest hundred pounds</a>, how much worse off the average British family would be if it voted Leave. This "fact" was as implausible as the "fact" that more money could go to the NHS, and I think the electorate recognised this and so the vote came down to taking the risk, or not. Bres-xit won, when Yes (to Scottish independendce) lost because Brexit unified those above and below the "risk averse" region, wheras Yes isolated those below the "risk averse" region and did not appeal to those above it.<br />
<br />
At the heart of <i>Ethics in Quantitative Finance</i> is the idea that decisions about an uncertain future cannot rely on "matters of fact"<i> </i>relating to how nature is, what Locke described as <i>physica</i>, but on "judgement of the will", or <i>practica</i>. Contemporary mathematics is closely associated with <i>physica</i>, but as I explain in the text, before the mid-nineteenth century mathematics concerned itself with both <i>physica</i> and <i>practica</i>. A key episode in the diminution of <i>practica</i> in maths was the abandonment of moral expectation to solve the <a href="http://magic-maths-money.blogspot.co.uk/2013/03/the-perils-of-physics-imperialism.html" target="_blank">Petersburg</a> game in favour of idealised utility functions.<br />
<br />
My submission of the manuscript to Palgrave in early April was closely followed by the calling of the 2017 general election. At the time my reaction was that the Prime Minister had reflected on the forthcoming Brexit process, decided it was going to be impossible and so called an election in the expectation that the Conservative government would lose. This was regarded as absurd at the time given the<a href="http://www.bbc.co.uk/news/election-2017-39856354" target="_blank"> lead the government had in the polls in April</a>, a perspective confirmed by the local and Scottish government election results from the beginning of May.<br />
<br />
However, the Conservatives proceeded to run an unbelievably inept campaign that centred on the <i>ad nauseum</i> repetition of a "strong an stable" mantra while its poll leave evaporated. The Labour party focused on an anti-austerity campaign but was ambiguous about specific details. I still don't understand what a Labour government would do in regard to EU relations or government finances. The only thing I was sure of was they would subsidise the children of the<a href="http://www.labour.org.uk/page/-/Images/manifesto-2017/Funding%20Britain%27s%20Future.PDF" target="_blank"> rich and professional classes who attend university more than they would provide additional funding to the NHS</a>. Neither party offered the public an <a href="https://www.theguardian.com/business/2017/may/26/conservative-labour-tax-spending-plans-ifs-general-election-manifesto" target="_blank">"honest set of choices"</a>.<br />
<br />
The aim of the British Prime Minister in calling the election seems to have been to secure a mandate that would enable her to direct the Brexit negotiations as she wished. In essence it was to accumulate as many votes as possible while the objective of th eLabour party was to prevent her doing so. There was no substantial discussion of policy choices or the implications of those choices.<br />
<br />
This reminded me of the environment in finance in the run up to the Credit Crisis. Financial institutions were focused on reaping profits from investing in MBS of sub-prime mortgages, confident in the concrete number of market prices without reflecting on what those numbers implied. It seems that in the sprinf of 2017 the Conservative government was focused on winning votes, confident in the concrete number of opinion polls without
reflecting on what those numbers implied. They saw a substantial lead and a "majority" in favour of Brexit without understanding where that majority originated.<br />
<br />
The political turmoil the UK is experiencing is, like the Credit Crisis, as consequence of politicians (market participants) not being objectively true, subjectively truthfull and socially right. The problem originate in the GFC. In its aftermath, government policy has quietly supported the wealthy, through bank bailouts and price support delivered by QE, while loudly calling on the less well off to "tighten their belts". The crisis will continue so long as the public do not trust finance or their politicians.<br />
<br />
<br />
<br />
<br />
<br />
<br />Tim Johnsonhttp://www.blogger.com/profile/06952723922503939504noreply@blogger.com0tag:blogger.com,1999:blog-3046071861494986299.post-80496219437931648492017-06-12T03:13:00.000-07:002017-06-12T03:13:51.314-07:00Egyptian and Mesopotamian approaches in economics<div style="text-align: justify;">
My <a href="http://magic-maths-money.blogspot.co.uk/2017/05/a-financial-approach-to-clash-of.html" target="_blank">previous post</a> was born out of my frustration that some feel that there is a 'clash of cultures' that will inevitably lead to conflict between east and west/Islam and Christianity. My view is that within Europe, the Middle East or China there are tensions between liberalism and authoritarianism with any society being susceptible to becoming dominated by either strand. Every individual needs to decide whether to place there faith in authoritarianism or liberalism, a decision which will be dominated by their experience.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
I believe a person's attitude to uncertainty will be fundamental in determining their view towards liberalism or authoritarianism. <a href="https://books.google.co.uk/books?id=S6WHAgAAQBAJ" target="_blank">Cheryl Misak</a> explains the argument: if the future is unpredictable one must be liberal and open to any point of view, since a minority view might actually be the best. If the future is predictable then one should place faith in those most competent at predicting the future.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
Some ancient historians highlight how Mesopotamian society was founded on unpredictability while the opposite was true for Egypt, and this had profound effects on their cultures and religions.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
Mesopotamia is a flat flood plain surrounded on three sides by mountains and to the south by desert. </div>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPN7EvyDejfAIkCIPsB_3EX46vQcZiduNT3I8U2H9Dmyb1PcIBqbVHdrc52iaed61UmfeK0FntUvr2ytfszSs7mTGjJoQU-hVSO1_6ph_44iJfEruN_IsGXzEjGQNvEIhyphenhyphenkFHBmX49NN8/s1600/1200px-N-Mesopotamia_and_Syria_english.svg.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="848" data-original-width="1200" height="452" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPN7EvyDejfAIkCIPsB_3EX46vQcZiduNT3I8U2H9Dmyb1PcIBqbVHdrc52iaed61UmfeK0FntUvr2ytfszSs7mTGjJoQU-hVSO1_6ph_44iJfEruN_IsGXzEjGQNvEIhyphenhyphenkFHBmX49NN8/s640/1200px-N-Mesopotamia_and_Syria_english.svg.png" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-size: xx-small;">By <a href="https://commons.wikimedia.org/wiki/User:Goran_tek-en" title="User:Goran tek-en">Goran tek-en</a> - <span class="int-own-work" lang="en">Own work</span>Based on;<a href="https://commons.wikimedia.org/wiki/File:Karte_Mesopotamien.png" title="File:Karte Mesopotamien.png">Karte von Mesopotamien</a><a href="https://commons.wikimedia.org/wiki/File:N-Mesopotamia_and_Syria.svg" title="File:N-Mesopotamia and Syria.svg">Mesopotamia Syria</a>, <a href="http://creativecommons.org/licenses/by-sa/3.0" title="Creative Commons Attribution-Share Alike 3.0">CC BY-SA 3.0</a>, <a href="https://commons.wikimedia.org/w/index.php?curid=30851043">Link</a></span></td></tr>
</tbody></table>
<div class="separator" style="clear: both; text-align: center;">
</div>
<div style="text-align: justify;">
The region, as an alluvial flood plain, was extremely fertile. However it was susceptible to <a href="http://www.globalsecurity.org/military/world/iraq/history-deluge-2.htm" target="_blank">devastating floods</a>, which tended to come at the end of the crop growing season, that could destroy communities. The Mesopotamian civilisations were also vulnerable to invasions from mountain tribes, such as the Hittites from Anatolia to the north or Medes from the Zagros to the east. As a result Mesopotamian religion sought to understand capricious gods and learn to predict their behaviour. This motivated the development of astronomy supported by mathematics.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
Ancient Egypt also survived because of a river, the Nile. The civilisation developed a few miles either side of the river and its delta, surrounded by desert that isolated the Egyptians from other civilisations. Unlike the Tigris and Euphrates, the Nile followed a predictable cycle, flooding annually in a controlled manner. Rather than bringing destruction, these annual floods rejuvenated the region just as it seemed to become gripped by drought. A consequence was Egyptian civilisation was relatively static with a religion that focussed on cosmic equilibrium and<br />
<br />
The difference between Egyptian and Mesopotamian approaches are highlighted in their different conceptions of the afterlife. Egyptians believed that if individuals had lead a moral life such that they could pass the judgement of the gods, then their soul would enter paradise on death. Because the natural world followed stable, predictable patterns, there were regular laws of nature and it followed that there were clearly defined laws of morality, which must be observed. The Mesopotamian afterlife was a dark, desert-like underworld devoid of water or food; the dead ate dust. Everyone ended up in this heel, whether they had been good or bad, reflecting the capriciousness of life.<br />
<br />
Essentially, the Egyptian conception was based on justice: if a person leads a moral life they will be rewarded. The Mesopotamians, on the other hand, did not assume an individual gets their just deserts.<br />
<br />
I feel that much of the discussion around 'economic justice' presupposes that the world is governed by stable laws that represent an ideal (traditionally, the divine) and this means that choices can be judged as either good or bad. I am not convinced such stable laws exist in societies and so clear cut judgements are difficult to arrive at.<br />
<br />
I started thinking about these ideas after I spoke at the <a href="https://www.list.co.uk/event/716722-morality-out-of-money/" target="_blank">Edinburgh Science Festival</a> and an audience member was angered by my lack of attention to the problem of wealth inequality. They asserted that money should be distributed "democratically" and seemed to be under the impression that, as a mathematician, I claimed to have deduced a way of "fairly" distributing wealth. As someone who is extremely sceptical that economics follows any identifiable patterns, just as the Mesopotamians seem to have rejected the idea that there are stable laws of nature, this has never been my objective. What I am interested in is what is the role of mathematics in finance. My conclusion is that financial markets are arenas in which parties work towards coming to agreement. This means that to work well they must be governed by discursive rules, rather than traditional norms about what is "good" or "evil". I adopt Habermas and argue that statements in finance, prices quoted, must be true, truthful and right. They must conform to objective, subjective and social truth criteria. To this end I argue that reciprocity determines the objective truth of a price and is linked to mathematics, while sincerity addresses the subjective truth and charity delivers social rightness. Together these norms lay the foundations for trust in finance.<br />
<br />
<br /></div>
Tim Johnsonhttp://www.blogger.com/profile/06952723922503939504noreply@blogger.com3tag:blogger.com,1999:blog-3046071861494986299.post-70841272427117435832017-05-22T08:33:00.000-07:002017-05-22T08:33:28.846-07:00A Financial Approach to the 'Clash of Cultures'<br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
Noah Smith has posed a question that resulted in a tweet
thread<o:p></o:p><o:p> </o:p></div>
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Question for historians: Has anyone written of a unique, deep-rooted enmity between Europeans and Middle Easterners? <a href="https://t.co/O5pJP1BkFl">https://t.co/O5pJP1BkFl</a></div>
— Noah Smith (@Noahpinion) <a href="https://twitter.com/Noahpinion/status/864902512649748480">May 17, 2017</a></blockquote>
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He later highlighted a book on the question of the
‘east-west divide’.<span style="mso-spacerun: yes;"> </span>Noah’s question
seems to have been prompted by discussion of the activities of Stephens Bannon
and Miller in attacking Islam.<br />
<o:p></o:p><br />
<blockquote class="twitter-tweet" data-cards="hidden" data-lang="en">
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I read this book laying out the thesis of a long-standing Europe-ME conflict: <a href="https://t.co/JjgeUuvK94">https://t.co/JjgeUuvK94</a><br />
<br />
It was an OK book.</div>
— Noah Smith (@Noahpinion) <a href="https://twitter.com/Noahpinion/status/864910049495236608">May 17, 2017</a></blockquote>
</div>
I can’t point Noah towards a book that explains the clash
but for the past year I have been working on <a href="https://www.amazon.co.uk/Ethics-Quantitative-Finance-Pragmatic-Financial/dp/3319610384/" target="_blank"><i>Ethics in Quantitative Finance</i></a>
which sheds some light on the topic, but from a different perspective.<span style="mso-spacerun: yes;"> </span>The
aim of the book is to investigate the relationship between mathematics, finance
and ethics.<span style="mso-spacerun: yes;"> </span>The initial findings were
unexpected for a mathematician.<span style="mso-spacerun: yes;"> </span>They
revealed that there was a recurring theme that finance drove the development of
science and democratic politics.<span style="mso-spacerun: yes;"> </span>The
book was written in the context of an emergence of intolerant populism that I
experienced during Scottish Independence Referendum of 2014, the UK EU
Referendum of 2016 and the US Presidential Election.<o:p></o:p><br />
<br />
I became interested in Islam on the evening of 9 November
1989.<span style="mso-spacerun: yes;"> </span>I was living in London as a recent
graduate working for an oil company and, watching the collapse of the Berlin
Wall with my two flat-mates we came to the conclusion that, following the
collapse of Communism, tensions would emerge between Islam and the West,
bearing in mind the two cultures had been allied against the Soviet Union for a
decade. <span style="mso-spacerun: yes;"> </span>The following weekend I bought
Lapidus’ <a href="http://www.cambridge.org/catalogue/catalogue.asp?isbn=1139989170" target="_blank"><i style="mso-bidi-font-style: normal;">A History of Islamic Societies</i></a>
and spent the following decade forming a positive opinion of the culture, not
least because in the early 1990s I spent about 6 months in the UAE.<br />
<o:p></o:p><br />
<br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
<br />
A point struck me while reading a biography of Sir Richard
Francis Bacon.<span style="mso-spacerun: yes;"> </span>For most of Bacon’s
lifetime, married women in Britain could not own property, it was all owned by
their husbands.<span style="mso-spacerun: yes;"> </span>This was not the case in
Islam, with the famous example of Muhammed wife Khadija.<span style="mso-spacerun: yes;"> </span>Rather than this custom being seen as
progressive by Victorian Britain, it was regarded as another manifestation of
the effeminacy of Islam and part of the justification for Europe’s dominance of
Islamic states, from North Africa to East Asia.<span style="mso-spacerun: yes;">
</span>Islam’s toleration of sexual diversity was another manifestation of this
effeminacy.<span style="mso-spacerun: yes;"> </span>Burton’s career in the East
India Company was curtailed by his exploration of homosexual brothels and he
coined the term ‘<a href="https://en.wikipedia.org/wiki/Sotadic_zone" target="_blank">Sotadic zone</a>’, which broadly coincided with the predominantly
Muslim lands he was familiar with. <span style="mso-spacerun: yes;"> </span>In
Wilfred Thesinger’s 1920s books on Arabia there is discussion of <i style="mso-bidi-font-style: normal;">mukhannath</i> and <i style="mso-bidi-font-style: normal;">mustergil</i>, people who are transgender and long accepted in Arabic
society. <o:p></o:p><br />
These portrayals of Islam are diametrically opposite to
contemporary attitudes.<span style="mso-spacerun: yes;"> </span>Today it is the
west that tolerates sexual diversity and gender equality while Islam is
presented as repressive.<span style="mso-spacerun: yes;"> </span>My conclusion
was, and is, that Islam provides a convenient embodiment of “the other” where
by specific examples of how Islam is opposite to the West come to dominate how
the west sees Islam, while the similarities are ignored.<span style="mso-spacerun: yes;"> </span>Many Muslims regard Friday 13<sup><span style="font-size: x-small;">th</span></sup> as
the holiest day (the Arabic letter ‘M’ for Muhammed is the 13<sup><span style="font-size: x-small;">th</span></sup> in
the alphabet); in the west it is regarded as unlucky.<span style="mso-spacerun: yes;"> </span><o:p></o:p></div>
<br />
Both Islam and Christianity are built, substantially, on
foundations laid by Greek philosophy.<span style="mso-spacerun: yes;">
</span>One account (I think it is <a href="https://www.amazon.co.uk/Unveiling-Islam-Islamic-Texts-Society/dp/0946621322" target="_blank"><i style="mso-bidi-font-style: normal;">Unveiling Islam</i></a>) of the difference is that Islam is rooted in the intellect ‒ it is
logical to be a Muslim – where as Christianity is distinguished by its
foundation on ‘charity’ (love). <span style="mso-spacerun: yes;"> </span>This
suggests that there is more in common between Islam and Christianity as there
are differences this does not imply that there is not a ‘clash of cultures’,
just that the clash is more complex than Christian v. Muslim or ‘East’ v.
‘West’.<span style="mso-spacerun: yes;"> </span><o:p></o:p><br />
<br />
Greek culture that emerged around 600 BCE became known for
being distinctive in its attitudes to politics and science.<span style="mso-spacerun: yes;"> </span>Greek science developed a non-mythical
cosmology. <span style="mso-spacerun: yes;"> </span>The central idea emerged in
Miletus, in Anatolia, and was <i style="mso-bidi-font-style: normal;">apeiron</i>
(‘without limit’), something boundless, homogenous, eternal and abstract yet it
held and motivated all things.<span style="mso-spacerun: yes;">
</span>Simultaneously, across the Aegean in Athens, Greek ideas of democracy
were codified.<span style="mso-spacerun: yes;"> </span>The standard explanations
used to argue that the non-mythical cosmology originated in the <i style="mso-bidi-font-style: normal;">polis</i> where citizens were equal and
ruled by an impersonal law: democracy generates science.<span style="mso-spacerun: yes;"> </span>This account did not acknowledge the temporal
simultaneity of the origins of the ideas but there geographical
separation.<span style="mso-spacerun: yes;"> </span>There needed to be something
that preceded democracy and science common to both Athens and Miletus.<o:p></o:p><br />
<br />
A more empirical explanation for origin of the distinctive
nature of Greek politics and science lies in the Greek adoption of money in
everyday use.<span style="mso-spacerun: yes;"> </span><o:p></o:p><br />
<br />
Money can be seen as a prototype for the <i style="mso-bidi-font-style: normal;">apeiron</i>.<span style="mso-spacerun: yes;">
</span>Money is ‘fungible’, meaning one money-token is indistinguishable from
any other, it is an empty signifier, like a word used in everyday
language.<span style="mso-spacerun: yes;"> </span>The impersonality of money
means that it is universal and makes no distinctions; it is used by rich and
poor uniting opposites.<span style="mso-spacerun: yes;"> </span>There is a
discrepancy between the value of money and its commodity value because money an
abstract concept signified by a concrete token.<span style="mso-spacerun: yes;">
</span>Because it is abstracted, unlike any substance, money is unlimited.<span style="mso-spacerun: yes;"> </span>It has the power to transform objects, being
able to turn wheat into wine in the market.<span style="mso-spacerun: yes;">
</span>Together, these properties enable money to perform multiple functions
simultaneously. <span style="mso-spacerun: yes;"> </span>It is used to meet
social obligations, such as tribute, legal compensation, and is the dominant
means of conducting exchange; it stores value and is the unit of account.<span style="mso-spacerun: yes;"> </span>Money’s myriad uses means that it becomes a
universal aim of all members of the community using it.<span style="mso-spacerun: yes;"> </span><o:p></o:p><br />
<br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
Money centralised social power in a single, abstract and
impersonal entity.<span style="mso-spacerun: yes;"> </span>In monetised, Greek,
economies personal power arose from the possession of impersonal and
non-substantial money.<span style="mso-spacerun: yes;"> </span>The impersonality
of Greek money nurtured the concept of equality, which is the foundation of
democracy.<span style="mso-spacerun: yes;"> </span>The Greek word <i style="mso-bidi-font-style: normal;">nomos</i>, associated with ‘law’, is the
root of the Greek word for money, <i style="mso-bidi-font-style: normal;">nomisma</i>.<span style="mso-spacerun: yes;"> </span>When combined with ‘auto’ – self – it gives
autonomy, the idea that people can govern themselves and out of it, the concept
of the individual emerges.<span style="mso-spacerun: yes;"> </span><o:p></o:p></div>
<br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
The foundations of Athenian democracy where laid by Solon
(c. 638‒558) when he instituted several legal reforms.<span style="mso-spacerun: yes;"> </span>These sought to address instability created
by conflicts in society caused by growing inequality created by the
financialisation of society.<span style="mso-spacerun: yes;"> </span>Solon’s
reforms solved the problems by substituting judicial violence with fines,
something that was only possible because money was widely used.<span style="mso-spacerun: yes;"> </span>In the process, justice was depersonalised so
that hostility between people was replaced by an impersonal quantification
between an injury and its compensation.<span style="mso-spacerun: yes;">
</span>While money was disruptive of society it was also integral to Solon’s
reforms that created a political system in which all citizens were equal.<o:p></o:p></div>
<br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
Greek’s highlighted how their culture was distinctive from
that of their neighbours, notably those in the civilised East.<span style="mso-spacerun: yes;"> </span>The Greeks contrasted Solon’s democratic laws
to those of the Median tyrant Deioces .<span style="mso-spacerun: yes;">
</span>The Greeks assumed that the Medes had originally lived in autonomous
towns but Deioces determined to unite them under his rule.<span style="mso-spacerun: yes;"> </span>He achieved this by gaining a reputation as
an honest judge and then stopped giving judgements.<span style="mso-spacerun: yes;"> </span>The Medes were so desperate for his decisions
that they offered him the crown.<span style="mso-spacerun: yes;"> </span>On
achieving his objective Deioces ordered his subjects to build him the palace of
Ecbatana, surrounded by seven concentric circular walls of different colours
with the inner most being silver then golden.<span style="mso-spacerun: yes;">
</span>Deioces hid himself from his subjects in the palace and ruled through
messengers using a network of spies to monitor the kingdom.<span style="mso-spacerun: yes;"> </span>The Greeks compared Solon’s position as
impartial arbiter in an open court to Deioces’ despotism, where the judge was
hidden.<o:p></o:p></div>
<br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
The essential difference was that Greek society was
monetised and operated through inter-personal exchange where as that of the
neighbouring societies were re-distributive.<span style="mso-spacerun: yes;">
</span>In re-distributive societies, power originated in the gods.<span style="mso-spacerun: yes;"> </span>Priests (or a king, the distinction was often
blurred) were the direct servants of the gods who mediated between the
population and the divine.<span style="mso-spacerun: yes;"> </span>All that the
community produced was owned, exclusively, by the gods and managed by a
hierarchy of priests/kings.<span style="mso-spacerun: yes;"> </span>Produce was
delivered to the temple (or palace) and the priests, from behind closed doors,
would re-distribute the aggregate production per their own rules, taking a cut
for their own use.<span style="mso-spacerun: yes;"> </span>In return, the
priest/kings were expected to provide material and social security: food
stores, walls, law and order.<span style="mso-spacerun: yes;"> </span>These
societies maintained themselves so long as the priest/kings prevented famine
and ensured peace and justice.<span style="mso-spacerun: yes;"> </span>It was
passed through the priests/kings into the community through a clear
hierarchy.<span style="mso-spacerun: yes;"> </span>The transference of power was
often done through seals (amulets, talisman) that magically carried the power
of the god.<o:p></o:p></div>
<br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
Greek religious practice diverged from this standard
model.<span style="mso-spacerun: yes;"> </span>The Greek gods lived on ambrosia
and nectar, not on mortal food.<span style="mso-spacerun: yes;"> </span>When
Homeric Greeks, in around 800 BCE, performed an animal sacrifice the smoke
‘honoured’ the gods, who were not located in their icons but ‘somewhere else’,
alienated from the people.<span style="mso-spacerun: yes;"> </span>The
sacrificial meat was then shared out amongst the community.<span style="mso-spacerun: yes;"> </span>The fairness of this sharing was fundamental
to Greek culture, with both the <i style="mso-bidi-font-style: normal;">Iliad</i>
and the <i style="mso-bidi-font-style: normal;">Odyssey</i> resting on problems
resulting from unfair distribution.<span style="mso-spacerun: yes;">
</span>Consequently, the wealth of the Greek temples was owned and managed,
inclusively, by the community in an egalitarian manner, in contrast to the
wealth of temples in re-distributive societies.<span style="mso-spacerun: yes;">
</span>There is a relationship between these Greek religious practices and the
emergence of money in Greek society.<span style="mso-spacerun: yes;"> </span>The
lowest value Greek coin was the <i style="mso-bidi-font-style: normal;">obolos</i>
that took its name from the cooking spits (<i style="mso-bidi-font-style: normal;">obelos</i>)
that were used to distribute sacrificial food and it is almost certain that the
word drachma comes from <i style="mso-bidi-font-style: normal;">obeliskon</i> <i style="mso-bidi-font-style: normal;">drachmai</i> ‒ handfuls of spits.<o:p></o:p></div>
<br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
The <i style="mso-bidi-font-style: normal;">Odyssey</i>
focuses on the Greeks’ sense of identity and emphasises the humanity and
individuality of Greek society.<span style="mso-spacerun: yes;"> </span>It
describes the transformation of Odysseus from an aristocratic warrior to a
democratic leader and represents a metaphor for the transformation of Greek
society from a hierarchy to a democracy.<span style="mso-spacerun: yes;">
</span>It begins with Odysseus and his followers leaving the defeat of Troy and
brutally attacking the Cicones.<span style="mso-spacerun: yes;"> </span>This
indicates that they have been traumatised by their experience of war and need
to be tempered before returning to the ideal of Ithaca.<span style="mso-spacerun: yes;"> </span>After attacking Cicones, the company arrive
on the island of the Lotus-eaters.<span style="mso-spacerun: yes;"> </span>Here
the traumatised fighters can eat the lotus and fall into oblivion.<span style="mso-spacerun: yes;"> </span>However, Odysseus chooses not to succumb to
the intoxication, rather he introduces the key theme of Greek philosophy of
reflecting on life and acting rationally.<span style="mso-spacerun: yes;">
</span>This is essential in establishing an individual’s identity.<span style="mso-spacerun: yes;"> </span><o:p></o:p></div>
<br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
The next episode is the story of the Cyclops and is an
example of a rebirth myth, where the hero enters a tomb/womb and is
reborn.<span style="mso-spacerun: yes;"> </span>Odysseus’ inquisitiveness leads
him to enter the cave of the cyclops, Polyphemus.<span style="mso-spacerun: yes;"> </span>The cave is full of food (cheese-symbolic of
animal husbandry).<span style="mso-spacerun: yes;"> </span>Odysseus intends to
exchange the cheese for wine but the cyclops does not understand the tradition
of exchange and starts eating Odysseus’ while trapping Odysseus and the rest in
the cave.<span style="mso-spacerun: yes;"> </span>Odysseus realises he cannot
defeat the cyclops using brute force, but must employ intelligence, in
particular <i style="mso-bidi-font-style: normal;">dolus</i> (trickery, cunning)
which is bestowed on Odysseus by Athena.<span style="mso-spacerun: yes;">
</span>Odysseus’ plan is to offer Polyphemus wine as a gift (as distinct from
in exchange), get him into a drunken stupor that will enable the crew to blind
the cyclops and escape.<span style="mso-spacerun: yes;"> </span>The meaning is
that Odysseus is reborn as a thinker not a fighter and as a thinker he can
defeat the myopic cyclops.<o:p></o:p></div>
<br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
The encounter with the cyclops introduces the political
theme of the Odyssey: should people be ruled by petulant autocrats supported by
an aristocracy of warriors or by thinking individuals who can rationally solve
problems.<span style="mso-spacerun: yes;"> </span>The fact that Odysseus is
still short of the ideal is demonstrated in the next encounter.<span style="mso-spacerun: yes;"> </span>The crew stay with King Aeolus who gives to
Odysseus a bag containing the winds that will prevent their ship returning to
Ithaca.<span style="mso-spacerun: yes;"> </span>However, Odysseus does not
explain the gift to his crew.<span style="mso-spacerun: yes;"> </span>They think
the bag contains gold that Odysseus is keeping for himself.<span style="mso-spacerun: yes;"> </span>While Odysseus sleeps the crew open the bag
to share out the gold, releasing the winds that blow them away from their
destination. <span style="mso-spacerun: yes;"> </span>Odysseus and his crew are
punished for not trusting each other.<o:p></o:p></div>
<br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
Odysseus has further experiences that temper him.<span style="mso-spacerun: yes;"> </span>The most profound being his trip to the
underworld where he encounters the dead warriors from Troy, Achilles, Ajax and Agamemnon.<span style="mso-spacerun: yes;"> </span>Achilles tells Odysseus that he would prefer
to be a living servant than a dead hero.<span style="mso-spacerun: yes;">
</span>This enlightens Odysseus who, having returned from Hades, is able to
resist the temptations of the Sirens’ offer of fame and glory and ends up on
the island of Ogygia, captured by the beautiful nymph Calypso.<span style="mso-spacerun: yes;"> </span>Calypso offers Odysseus immortality and a
life of pleasure, but she also represents death, in the same way that the
oblivion of the lotus eaters is vacuous.<span style="mso-spacerun: yes;">
</span>After seven or so years, Athena persuades Zeus to order Odysseus’s
release and the hero escapes on a raft.<span style="mso-spacerun: yes;">
</span>After all these trials, Odysseus has been transformed into a judicious
individual and is able to return to Ithaca disguised as a beggar, the polar
opposite of the aristocratic hero.<o:p></o:p></div>
<br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
The difference between the Greek (democratic,
individualistic) and Persian (hierarchical, re-distributive) cultures is
exemplified in Herodotus’ description of the first contact between Athens and
Persia in 507 BCE.<span style="mso-spacerun: yes;"> </span>The Athenians were
seeking Persian protection from the Spartans and initiated negotiations based
on their experience gained in the agora, the main meeting place of the <i style="mso-bidi-font-style: normal;">polis</i> that also severed as the market (<i style="mso-bidi-font-style: normal;">agora</i>, <i style="mso-bidi-font-style: normal;">forum</i> in Latin), as that of equals.<span style="mso-spacerun: yes;">
</span>This was inconceivable to the Persians who maintained a hierarchical
state that ruled from the Indus valley to Anatolia.<span style="mso-spacerun: yes;"> </span>The Persians promised to support the
Athenians in exchange for them ritually offering earth and water.<span style="mso-spacerun: yes;"> </span>After some discussion, the Greeks
agreed.<span style="mso-spacerun: yes;"> </span>They had not realised that they
were symbolically submitting Athens to Persia and would be punished if they did
not comply with Persian demands in the future.<span style="mso-spacerun: yes;">
</span>Following this misunderstanding, it was inevitable that the Persians
invaded Greece in 490 BCE.<span style="mso-spacerun: yes;"> </span>Despite the
material odds stacked against them, the Greeks, in the Delian League led by
Athens, first defeated two invasions and then pushed the Persians out of much
of the eastern Mediterranean by 449 BCE.<o:p></o:p></div>
<br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
While the clash of cultures is not geographical (western v.
eastern) or religious (Islam v. Christianity) but societal, relating to a
difference in ideology between monetised societies based on reciprocal exchange
resting on individual judgement in a democracy and those based on hierarchical
distribution of resources based on autocratic, often hidden, decision
making.<span style="mso-spacerun: yes;"> </span>Within Europe this conflict repeats
itself itself.<span style="mso-spacerun: yes;"> </span>It is central to the
Reformation, caricatured as between Calvinist merchants and Catholic
aristocrats.<span style="mso-spacerun: yes;"> </span>In England, there is the
Civil War, that ends with the Commonwealth, the Anglicisation of the Latin <i style="mso-bidi-font-style: normal;">res publica</i>, followed by the political
divide between Whigs and Tories. <span style="mso-spacerun: yes;"> </span>The
United States is the exemplar of Whig political philosophy, rooted in Locke’s
empirical political theories.<o:p></o:p></div>
<br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
The perennial question is why should an unstable monetised
society (capitalist) be preferable to a re-distributive one (communist).<span style="mso-spacerun: yes;"> </span>The answer depends on whether you believe the
future is predictable or not.<span style="mso-spacerun: yes;"> </span>If you
believe that science can tame uncertainty the implication is that the optimal
allocation of resources can be determined by a central authority, such as
Deicoes.<span style="mso-spacerun: yes;"> </span>If, on the other hand, you
believe the future is not knowable, you cannot rely on the calculations of the
auto/techno-cracy.<span style="mso-spacerun: yes;"> </span>Instead it is best to
allow anyone to participate in decision making in order to enable the best
solution to be identified.<span style="mso-spacerun: yes;"> </span><o:p></o:p></div>
<br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
This point was made by Moses ben Maimon, the twelfth century
rabbi from the Almoravid Islamic Empire. <span style="mso-spacerun: yes;"> </span>The Bible explains suffering on the basis that
people were expelled from the Garden of Eden.<span style="mso-spacerun: yes;">
</span>This is usually interpreted as going from plenty to scarcity into a
world of scarcity but ben Maimon argued that God’s punishment was not so much
about scarcity as uncertainty.<span style="mso-spacerun: yes;"> </span>In the
Garden of Eden, humans had perfect knowledge, which was lost with the Fall, and
it is the loss of this knowledge which is at the root of suffering: if people
know what will happen they can manage scarcity.<span style="mso-spacerun: yes;">
</span>Up until the nineteenth century, it was widely accepted that the world
was fundamentally uncertain.<span style="mso-spacerun: yes;"> </span>This was
expressed in Aristotle’s acceptance that there was a class of phenomena not
amenable to science, the Scholastic’s acceptance that God could defy the laws of
nature and Locke’s belief that knowledge would always be doubtful.<span style="mso-spacerun: yes;"> </span><o:p></o:p></div>
<br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
Spinoza, a Jewish <i style="mso-bidi-font-style: normal;">marrano</i>
living in Amsterdam in the mid-seventeenth century understood Greek philosophy
through Judaic and Islamic interpretations had argued that the Olympian
perspective of the scientist made the world deterministic.<span style="mso-spacerun: yes;"> </span>He argued that people believed themselves to
have free-will and had autonomy because they did not see the complete picture,
being only finite<!--[if supportFields]><span style='mso-element:field-begin'></span>xe
"free-will:in Spinoza"<![endif]--><!--[if supportFields]><span
style='mso-element:field-end'></span><![endif]-->.<span style="mso-spacerun: yes;"> </span>Spinoza believed that the purpose of the
individual was to lift themselves out of a mundane perspective<!--[if supportFields]><span
style='mso-element:field-begin'></span>xe "unity of science:in
Spinoza"<![endif]--><!--[if supportFields]><span style='mso-element:field-end'></span><![endif]-->
so that they could understand the totality of creation, coming to understand
the true nature of God’s will: the laws of nature.<span style="mso-spacerun: yes;"> </span>The ethical nature of the <i style="mso-bidi-font-style: normal;">Ethics</i> was in describing how different
actions helped, or hindered, the individual in approaching God, which would
give the correct perspective on everyday phenomena.<span style="mso-spacerun: yes;"> </span>Spinoza<!--[if supportFields]><span
style='mso-element:field-begin'></span>xe "knowledge:in Spinoza"<![endif]--><!--[if supportFields]><span
style='mso-element:field-end'></span><![endif]--> believed that at the most
basic level people had direct knowledge of nature through their senses.<span style="mso-spacerun: yes;"> </span>This could be improved into a scientific
knowledge of the world that showed connections between phenomena and so could
make generalisations.<span style="mso-spacerun: yes;"> </span>The goal was to
have direct knowledge of the generalisations, not mediated by ‘finite’ ideas or
concepts and this knowledge delivered true freedom.<span style="mso-spacerun: yes;"> </span><o:p></o:p></div>
Spinoza’s contribution to western philosophy was in
suggesting that humans can reach a complete picture of the universe that delivered
certain knowledge.<span style="mso-spacerun: yes;"> </span>This was novel to
Europeans rooted in the Scholastic tradition that synthesised Aristotle<!--[if supportFields]><span
style='mso-element:field-begin'></span>xe "Aristotle"<![endif]--><!--[if supportFields]><span
style='mso-element:field-end'></span><![endif]--> and Catholicism<!--[if supportFields]><span
style='mso-element:field-begin'></span>xe "Augustine"<![endif]--><!--[if supportFields]><span
style='mso-element:field-end'></span><![endif]-->.<span style="mso-spacerun: yes;"> </span>However, it was reminiscent of Jewish and
Islamic mysticism.<span style="mso-spacerun: yes;"> </span>Jewish mysticism ‒
Kabbalah ‒ had become prominent in the thirteenth century through Moshe ben
Naiman Girondi<!--[if supportFields]><span style='mso-element:field-begin'></span>xe
"Jewish philosophy:Girondi"<![endif]--><!--[if supportFields]><span
style='mso-element:field-end'></span><![endif]--><!--[if supportFields]><span
style='mso-element:field-begin'></span>xe "Jewish philosophy:influence on
Spinoza"<![endif]--><!--[if supportFields]><span style='mso-element:field-end'></span><![endif]-->,
from Catalonia, while Sufi thought was legitimised in the eleventh century by
the Islamic scholar al Ghazali.<span style="mso-spacerun: yes;"> </span>Both
these scholars challenged Hellenistic philosophy, with al-Ghazali’s repudiation
of Aristotle in <i style="mso-bidi-font-style: normal;">The Incoherence of the
Philosophers</i> being pivotal in the development of Islamic thought.<span style="mso-spacerun: yes;"> </span>Associated with al-Ghazali<!--[if supportFields]><span
style='mso-element:field-begin'></span>xe "Islamic philosophy:al-Ghazali"<![endif]--><!--[if supportFields]><span
style='mso-element:field-end'></span><![endif]--> was the doctrine of
‘occasionalism’, that effect follows cause not because of a physical law but
only because God’s will.<span style="mso-spacerun: yes;"> </span>Spinoza echoed
this attitude when he argued that a law of nature was simply a consequence of
God’s ‒ or nature’s ‒ consistency.<span style="mso-spacerun: yes;"> </span>In
Sufi metaphysics, there is the concept of ‘Unity of Essence’ (<i style="mso-bidi-font-style: normal;">wahdat al-wujud</i>, وحدة الوجود) <!--[if supportFields]><span
style='mso-element:field-begin'></span>xe "Islamic philosophy:<i
style='mso-bidi-font-style:normal'> wahdat al-wujud</i>"<![endif]--><!--[if supportFields]><span
style='mso-element:field-end'></span><![endif]-->and the idea that people seek
‘annihilation in God’ (<i style="mso-bidi-font-style: normal;">fanaa</i>, <span dir="RTL" lang="AR-SA">فناء</span><span style="mso-bidi-language: HE;"></span>)
just as for Spinoza people sought a God-like perspective.<span style="mso-spacerun: yes;"> </span>While Islam and Spinoza<!--[if supportFields]><span
style='mso-element:field-begin'></span>xe "determinism:in Spinoza"<![endif]--><!--[if supportFields]><span
style='mso-element:field-end'></span><![endif]--><!--[if supportFields]><span
style='mso-element:field-begin'></span>xe "certainty:in Spinoza"<![endif]--><!--[if supportFields]><span
style='mso-element:field-end'></span><![endif]--> both denied contingency, they
did not deny the ability of the individual to assert their own will, it was
just that asserting one’s will against God ‒ or nature ‒ would be detrimental
to the individual. <!--[if supportFields]><span style='mso-element:field-begin'></span>xe
"free-will:in Spinoza"<![endif]--><!--[if supportFields]><span
style='mso-element:field-end'></span><![endif]--><!--[if supportFields]><span
style='mso-element:field-begin'></span>xe "free-will:in Islam"<![endif]--><!--[if supportFields]><span
style='mso-element:field-end'></span><![endif]--><span style="mso-spacerun: yes;"> </span>This idea of determinism<!--[if supportFields]><span
style='mso-element:field-begin'></span>xe "prediction:in Spinoza"<![endif]--><!--[if supportFields]><span
style='mso-element:field-end'></span><![endif]--> was unusual in European
thinking.<span style="mso-spacerun: yes;"> </span>The Greeks (especially in the
Oedipus myth) and Calvinists believed in predestination, that the fate of a
person’s soul <!--[if supportFields]><span style='mso-element:field-begin'></span>xe
"soul, the:in Calvinism"<![endif]--><!--[if supportFields]><span
style='mso-element:field-end'></span><![endif]-->was destined <!--[if supportFields]><span
style='mso-element:field-begin'></span>xe "predestination:in Spinoza"<![endif]--><!--[if supportFields]><span
style='mso-element:field-end'></span><![endif]-->, but an individual had will
throughout their life.<span style="mso-spacerun: yes;"> </span>Spinoza’s
argument was that individuals do not have a choice in correct action; knowledge<!--[if supportFields]><span
style='mso-element:field-begin'></span>xe "knowledge:in Spinoza"<![endif]--><!--[if supportFields]><span
style='mso-element:field-end'></span><![endif]--> guides them to the correct
course.<span style="mso-spacerun: yes;"> </span>If someone makes an immoral
choice, it is through ignorance.<span style="mso-spacerun: yes;"> </span><o:p></o:p><br />
<br />
As a mathematician ‒ that is someone who sees an equivalence
between a donut and a coffee cup ‒ there is no real clash of cultures between
Donald Trump and Salman bin Abdulaziz, they are equivalent in representing
non-democratic rulers.<span style="mso-spacerun: yes;"> </span>While it seems
incongruous that the President of the US is accompanied on state occasions by
his daughter and son-in-law and that he is above the rule of law, this would be
normal for an absolute monarch.<span style="mso-spacerun: yes;"> </span>Modern
populism involves an economic shift to the left accompanied by a cultural shift
to the right.<span style="mso-spacerun: yes;"> </span>It does not really matter
if this is in Russia, India, Saudi Arabia, Britain or France.<span style="mso-spacerun: yes;"> </span>The opposite of this populism is pluralistic
debate rather than simple panaceas, which are destined to fail.<o:p></o:p>Tim Johnsonhttp://www.blogger.com/profile/06952723922503939504noreply@blogger.com2tag:blogger.com,1999:blog-3046071861494986299.post-76763131352747038702017-02-28T06:21:00.002-08:002017-02-28T06:21:30.462-08:00Where do experts come from?<style type="text/css">p.sdendnote-western { margin-bottom: 0.35cm; font-family: "Liberation Serif",serif; font-size: 12pt; line-height: 150%; }p.sdendnote-cjk { margin-bottom: 0.35cm; font-family: "Tahoma"; font-size: 12pt; line-height: 150%; }p.sdendnote-ctl { margin-bottom: 0.35cm; font-family: "Liberation Serif"; font-size: 12pt; line-height: 150%; }p { margin-bottom: 0.25cm; direction: ltr; line-height: 120%; text-align: justify; }p.western { font-family: "Liberation Serif",serif; font-size: 12pt; }p.cjk { font-family: "Tahoma"; font-size: 12pt; }p.ctl { font-family: "Liberation Serif"; font-size: 12pt; }a.sdendnoteanc { font-size: 57%; }</style>
<br />
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<a href="https://www.blogger.com/null" name="spinoza_4_2"></a>
Over the weekend, Brigitte Nerlich published a piece on the origin of
the ‘deficit model’.
<br />
<blockquote class="twitter-tweet" data-lang="en">
<div dir="ltr" lang="en">
My post from the weekend on trying to find the origins of the 'deficit model' in <a href="https://twitter.com/hashtag/scicomm?src=hash">#scicomm</a> <a href="https://t.co/fhZk8bXUg2">https://t.co/fhZk8bXUg2</a></div>
— Brigitte Nerlich (@BNerlich) <a href="https://twitter.com/BNerlich/status/836106604210696193">February 27, 2017</a></blockquote>
The ‘deficit model’ is the idea that if the public understood
scientific concepts they would accept the judgements of scientists.
Or, if scientists shout loud enough eventually people will agree with
them. Or, people don’t like GMOs/fracking/climate change science
because they are dumb.</div>
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This is a hot-topic in the aftermath of the US Presidential Election
and theUK’s EU Referendum, when ‘experts’ were widely ignored
and her contribution has been well received.<br />
<blockquote class="twitter-tweet" data-lang="en">
<div dir="ltr" lang="en">
<a href="https://twitter.com/BNerlich">@BNerlich</a> Very good.<br />
1/ I think there are some roots in the "health belief model" which dates to the 1950s --> <a href="https://t.co/cPOdz0EcOd">https://t.co/cPOdz0EcOd</a></div>
— Roger Pielke Jr. (@RogerPielkeJr) <a href="https://twitter.com/RogerPielkeJr/status/836341465622048768">February 27, 2017</a></blockquote>
My reaction to Brigitte’s tweet was Spinoza of course, but
there was no reference of the seventeenth century Dutch philosopher
in her piece.</div>
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My interest is as part of my remit as the RCUK Academic Fellow for
Financial Mathematics between 2006 and 2011 was the ‘<a href="http://magic-maths-money.blogspot.co.uk/2009/02/recent-report-from-lse-has-raised-some.html" target="_blank">publicunderstanding of Financial Mathematics</a>’, or at least the ‘public
engagement with Financial Mathematics’. This introduced me to the
issue of the ‘<a href="http://magic-maths-money.blogspot.co.uk/2013/01/science-politics-mathematics-and-finance.html" target="_blank">deficit model</a>’ over a period in time dominated by
the ‘Great Financial Crisis, which started 10 years ago yesterday.
</div>
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For almost ten years I have been trying to figure out what is the
relationship between finance, mathematics and ethics. To me, a
significant contributor to the GFC was the belief that ‘science’
had some how tamed financial risk. Therefore to understand the GFC
it was necessary to understand where the faith in scientific
determinism originated, and I think the source (in European science
at any rate) is in Spinoza. The argument is presented in the book I
am finishing off for Palgrave<br />
<blockquote class="twitter-tweet" data-lang="en">
<div dir="ltr" lang="en">
You can catch <a href="https://twitter.com/hashtag/Palgrave?src=hash">#Palgrave</a> author Timothy Johnson speaking about morality out of money at the <a href="https://twitter.com/EdSciFest">@EdSciFest</a> on 9 April <a href="https://t.co/bQ2GzCOLRB">https://t.co/bQ2GzCOLRB</a></div>
— Palgrave Finance (@PalgraveFinance) <a href="https://twitter.com/PalgraveFinance/status/834092033610567682">February 21, 2017</a></blockquote>
and I have extracted two relevant sections, separated by some 27,000
words and 125 years.</div>
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Baruch Spinoza would produce the most influential development of
Descartes’ philosophy that incorporated ideas from de Groot and
Hobbes during the ‘Dutch Golden Age’. Spinoza’s family were
Portuguese Jews, <i>marranos</i>, who had been forcibly converted to
Christianity in the sixteenth century. They had immigrated to the
United Provinces in 1593, taking advantage of Calvinist toleration
and Baruch’s father became a prominent, and wealthy, citizen of
Amsterdam. Baruch was born in 1632, his first language was
Portuguese and he grew up studying in Spanish and Hebrew and he only
studied Latin in his twenties. His understanding of Greek philosophy
came primarily through Judaic and Islamic interpretations, rather
than from the Scholastics.
</div>
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Spinoza became involved with the Collegiants, a sect that had emerged
as a successor to the Arminians, and was eventually excommunicated by
his synagogue in 1656, changing his name to Benedictus. The
excommunication did not worry Spinoza too much and he developed a
reputation as a teacher, writer and a lens-grinder, a skilled
profession closely associated with the important new science of
optics. Supported, in part, by a pension from de Witt, he developed
his philosophy and in 1670 moved to The Hague where he would witness
de Witt’s murder in 1672. He died in 1677, probably of
tuberculosis.</div>
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<a href="https://www.blogger.com/null" name="spinoza_4_1"></a>
Spinoza’s most influential work, his <i>Ethics</i>, was published
posthumously in 1677. Spinoza echoed Plato, Augustine and Descartes
in arguing that mathematics provided the means of discerning truth<a class="sdendnoteanc" href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#sdendnote1sym" name="sdendnote1anc"><sup>i</sup></a>
and the text presented a deductive chain that proved propositions
having started with definitions and axioms. The key step that
Spinoza took in developing Descartes’ work was to collapse the
three types of substance: matter, mind and God, into one. This was
captured in his phrase <i>Deus sive natura</i>, ‘God or nature’,
indicating that there is only a single substance<sup>2</sup>
that, when viewed from one perspective is nature but from another is
God. This solved the problem of how Descartes’ mind interacted
with matter at the cost of prohibiting contingency<sup>3</sup>
because if everything was connected to God, it could not happen by
chance. This also meant that emotions were not part of the mind, and
so could not be rationalised, but were governed by the laws of
nature<sup>4</sup>,
as Hobbes had implied.
</div>
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Spinoza argued that people believed themselves to possess free-will
and had autonomy because they did not see the complete picture, being
only finite<sup>5</sup>.
Spinoza believed that the purpose of the individual was to lift
themselves out of a mundane perspective in order to comprehend the
totality of creation, coming to understand the true nature of God’s
will: the laws of nature. The ethical nature of the <i>Ethics</i>
was in describing how different actions helped, or hindered, the
individual in approaching God<sup>6</sup>,
which would give the correct perspective on everyday phenomena.
Spinoza believed that at the most basic level people had direct
knowledge of nature through their senses. This could be improved
into a scientific knowledge of the world that identified connections
between phenomena and so was able to make generalisations. The
ultimate aim was to have direct knowledge of the generalisations<sup>7</sup>,
not mediated by ‘finite’ ideas or concepts and this knowledge
delivered true freedom<sup>8</sup>.
</div>
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Spinoza’s contribution to western philosophy was in suggesting that
humans were capable of attaining a complete picture of the universe
that provided certain knowledge. This was novel to Europeans rooted
in the Scholastic tradition that synthesised Aristotle and Augustine.
However, it was reminiscent of Jewish and Islamic mysticism. Jewish
mysticism <span style="font-family: "times new roman" , serif;">‒</span> Kabbalah <span style="font-family: "times new roman" , serif;">‒</span>
had become prominent in the thirteenth century through Moshe ben
Naiman Girondi, from Catalonia, while Sufi thought was legitimised in
the eleventh century by the Islamic scholar Muhammad ibn Muhammad al
Ghazali. Both these scholars challenged Hellenistic philosophy, with
al-Ghazali’s repudiation of Aristotle in <i>The Incoherence of the
Philosophers</i> being pivotal in the development of Islamic thought.
Associated with al-Ghazali was the doctrine of occasionalism, that
effect follows cause not because of a physical law but only because
God’s will. Spinoza echoed this attitude when he argued that a law
of nature was simply a consequence of God’s <span style="font-family: "times new roman" , serif;">‒</span>
or nature’s <span style="font-family: "times new roman" , serif;">‒</span>
consistency<sup>9</sup>.
In Sufi metaphysics there is the concept of ‘Unity of Essence’
(<i>wahdat al-wujud</i>, <span style="font-family: "liberation" serif;"><span lang="hi-IN"><span style="font-family: "times new roman";">وحدة</span>
<span style="font-family: "times new roman";">الوجود</span></span></span>)
and the idea that people seek ‘annihilation in God’ (<i>fanaa,</i><span style="font-family: "lohit devanagari";"><span lang="hi-IN"><span lang="ar-SA">فناء</span></span></span>, <span style="font-family: "liberation" serif , serif;"></span>)<sup>10</sup>
just as for Spinoza people sought a God-like perspective. While
Islam and Spinoza both denied contingency, they did not deny the
ability of the individual to assert their own will, it was just that
asserting one’s will against God <span style="font-family: "times new roman" , serif;">‒</span>
or nature <span style="font-family: "times new roman" , serif;">‒</span> would be
detrimental to the individual<sup>11</sup>.
This idea of determinism was unusual in European thinking. The
Calvinists believed in predestination, that the ultimate fate of a
person’s soul was destined for heaven or hell, but an individual
had will throughout their life. Spinoza’s argument was that
individuals don’t really have a choice in correct action; knowledge
guides them to the correct course<sup>12</sup>.
If someone makes an immoral choice, it is through ignorance<sup>13</sup>.
This is less bestial than Hobbes but still rejects autonomy.</div>
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If Judaism can be characterised by the covenant with God and
Christianity by God’s <i>caritas</i> for people, in Islam people
can be characterised by having an intellect that can discern God’s
will<sup>14</sup>.
In this sense Spinoza was introducing Islamic, specifically Sufi,
ideas into western philosophy. This was possible because Spinoza was
re-presenting tested Islamic philosophy that opposed Aristotle, just
as European thought was rejecting Aristotelian ideas.
</div>
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The influence of Spinoza on western thought becomes significant at
the end of the Enlightenment. <a href="http://magic-maths-money.blogspot.co.uk/2012/07/is-risk-intelligence-dangerous-concept.html" target="_blank"> Romanticism</a> had appeared in English
literature in the 1790s. It incorporated Rousseau’s idealisation
of the ‘noble savage’, in a ‘state of nature’, and
empiricism, which focused on the individual sensation of nature. In
Germany, the movement was broader and more significant with a
philosophical basis, idealism, in a problem Kant created in trying to
resolve the issue of mind-body dualism. Idealism addressed the
problems by dissolving the distinction between observers and
observed, an approach that was heavily influenced by Spinoza<sup>15</sup>.
A core concept in idealism was the principle that what was observed
was dependent on the thinking ‘I’ that, itself, could only exist
in the context of society. This spawned the idea that national
identity was fundamental to the individual, fusing Spinoza, Rousseau
and Kant.
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Johann Wolfgang von Goethe, born in 1749, exemplified the broader
Romantic Movement. His fame was established with his 1774
sentimental novel <i>Die Leiden des jungen Werthers</i> (The Sorrows
of Young Werther). Today Goethe is known for his interpretation of
the Faust story, written in 1808, that describes how Mephistopheles
suggests that a ruler solved their financial problems by printing
paper money, backed by gold reserves, which were yet to be
discovered<sup>16</sup>.
In 1775 had been invited to become a civil servant for the small
Duchy of Weimar where he would remain a bureaucrat until his death in
1832. Goethe was responsible for some mines and became interested in
geology and the natural sciences generally. As a novelist, Goethe
was interested in the ‘narrative’ of science rather than brute,
individual facts, an approach that coincided with the idealists’
approach to science, <i>Naturphilosophie</i>.
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<i>Naturphilosophie</i> was personified by the Prussian naturalist
Alexander von Humboldt. Humboldt travelled to South America between
1799 and 1804 and gathered observations of nature that he then
presented in <i>Ansichten der Natur</i> (Aspects on nature) in 1807.
Humboldt aimed at Spinoza’s all-encompassing perspective that
transformed an apparently capricious nature into a cohesive whole<sup>17</sup>.
However, this implied that science was fundamentally subjective,
with the scientist being part of, not an objective observer of,
nature<sup>18</sup>.
To ensure that the ideas coming out of the mind of a scientist,
often presented as a solitary genius, were true representations of
the world, their observations had to be precise and accurate. Johann
Carl Friedrich Gauss, the director of the G<span style="font-family: "times new roman" , serif;">ö</span>ttingen
observatory from 1807, addressed the fidelity of scientific
observations by developing the Central Limit Theorem into a theory of
measurement and the Normal distribution, which is often referred to
as the Gaussian distribution.
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The Romantics regarded nature as a complex, ‘living’ organism and
were concerned with how nature changed, rather than focusing on how
it was at any single point in time<sup>19</sup>.
This represented a ‘counter-revolution’ in science, reverting to
Aristotelian qualities rather than Cartesian quantities. Some
Romantics, notably William Blake, were highly critical of the
mechanistic natural philosophy founded on Descartes and Newton<sup>20</sup>
and stressed the need for human imagination in theory construction.
With respect to Malthus, the Romantics saw his argument as reducing
people to elements of a machine and they preferred more paternalistic
policies, associated with the Tories.</div>
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Prussia had initially joined the attacks on Revolutionary France in
1792 but became neutral in 1795, content to see the Holy Roman
Empire, ruled by the Austrian Hapsburgs, disintegrate. However, in
1806, as Napoleon presented a greater threat, Prussia declared war on
the Empire and was swiftly defeated. In the aftermath of the defeat
the Prussian’s began a programme of reorganising the state
administration, inspired by Kantian ideals, whereby subjects would
become citizens<sup>21</sup>.
During this time, Georg W.F. Hegel developed idealism by arguing
that the nation was a living organism, with a purpose, will and
rationality<sup>22</sup>.
This contrasted with the dominant view of the eighteenth century
that saw the state as a machine designed to deliver ‘interests’,
a view that Hegel rejected for the same reasons that the Romantics
rejected mechanistic science. Hegel argued that the state’s will
was defined by ‘public opinion’ which expressed
</div>
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the genuine needs and correct tendencies of common life, but also, in
the form of common sense, of the eternal, substantive principles of
justice<sup>23</sup>.
</div>
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Hegel argued that the state and people were indistinguishable,
because an individual was formed in the context of culture, and so
their aims are necessarily compatible. In addition, he rejected the
idea that public opinion developed through discourse could be
meaningful, since it would only represent the subjective opinions of
a narrow section of the public<sup>24</sup>.
Therefore, like Rousseau, Hegel believed the well-constituted state
could not be challenged and the role of education was to ensure
people’s subjective opinions conformed to the state’s, Spinozian,
objectivity. This perspective can be contrasted with that of Thomas
Paine, who had argued at the start of <i>Common Sense</i>, an essay
of 1776 and a key inspiration of the American Revolution, that
</div>
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Some
writers have so confounded society with government, as to leave
little or no distinction between them; whereas they are not only
different, but have different origins. Society is produced by our
wants, and government by our wickedness; the former promotes our
happiness positively by uniting our affections, the latter negatively
by restraining our vices. The one encourages intercourse, the other
creates distinctions. The first is a patron, the last a punisher.<sup>25</sup></div>
<br />
<div id="sdendnote25">
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<span style="font-size: x-small;"><span style="font-family: "liberation" serif , serif;"><span style="font-size: small;"><span lang="en-GB">I suspect students of Spinoza and Hegel will object to my caricature, but I think the essential point that " </span></span></span></span>Spinoza’s contribution to western philosophy was in suggesting that
humans were capable of attaining a complete picture of the universe
that provided certain knowledge." is important in understanding why 'science' believes in the 'deficit model'.<br />
<br />
<span style="font-size: x-small;"><span style="font-family: "liberation" serif , serif;"><span style="font-size: small;"><span lang="en-GB">1
(Spinoza 2002, 240)</span></span></span></span></div>
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<span style="font-size: x-small;"><span style="font-family: "liberation" serif , serif;"><span style="font-size: small;"><span lang="en-GB">2
(Spinoza 2002, I.P14, 224)</span></span></span></span></div>
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<span style="font-size: x-small;"><span style="font-family: "liberation" serif , serif;"><span style="font-size: small;"><span lang="en-GB">3
(Spinoza 2002, I.P26, 232)</span></span></span></span></div>
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<span style="font-size: x-small;"><span style="font-family: "liberation" serif , serif;"><span style="font-size: small;"><span lang="en-GB">4
(Spinoza 2002, 277-278)</span></span></span></span></div>
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<span style="font-size: x-small;"><span style="font-family: "liberation" serif , serif;"><span style="font-size: small;"><span lang="en-GB">5
(Spinoza 2002, 238-241)</span></span></span></span></div>
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<span style="font-size: x-small;"><span style="font-family: "liberation" serif , serif;"><span style="font-size: small;"><span lang="en-GB">6
(Spinoza 2002, IV.P28, 334)</span></span></span></span></div>
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<span style="font-size: x-small;"><span style="font-family: "liberation" serif , serif;"><span style="font-size: small;"><span lang="en-GB">7
(Spinoza 2002, V.P25, 375)</span></span></span></span></div>
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<span style="font-size: x-small;"><span style="font-family: "liberation" serif , serif;"><span style="font-size: small;"><span lang="en-GB">8
(Spinoza 2002, 378-379)</span></span></span></span></div>
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<span style="font-size: x-small;"><span style="font-family: "liberation" serif , serif;"><span style="font-size: small;"><span lang="en-GB">9
(Spinoza 2002, 239)</span></span></span></span></div>
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<span style="font-size: x-small;"><span style="font-family: "liberation" serif , serif;"><span style="font-size: small;"><span lang="en-GB">10
(Davis 1984, 12)</span></span></span></span></div>
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<span style="font-size: x-small;"><span style="font-family: "liberation" serif , serif;"><span style="font-size: small;"><span lang="en-GB">11<i>
Qu’ran</i> 4:79, (Spinoza 2002, 359-362)</span></span></span></span></div>
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<span style="font-size: x-small;"><span style="font-family: "liberation" serif , serif;"><span style="font-size: small;"><span lang="en-GB">12
(Spinoza 2002, V.P42, 382)</span></span></span></span></div>
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<span style="font-size: x-small;"><span style="font-family: "liberation" serif , serif;"><span style="font-size: small;"><span lang="en-GB">13
(Spinoza 2002, IV.P27,334)</span></span></span></span></div>
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<span style="font-size: x-small;"><span style="font-family: "liberation" serif , serif;"><span style="font-size: small;"><span lang="en-GB">14
(Schuon 1976, 19-22)</span></span></span></span></div>
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<span style="font-size: x-small;"><span style="font-family: "liberation" serif , serif;"><span style="font-size: small;"><span lang="en-GB">15
(Frank 2003, 55-76), (Förster and Melamed 2012), </span></span></span></span>
</div>
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<span style="font-size: x-small;"><span style="font-family: "liberation" serif , serif;"><span style="font-size: small;"><span lang="en-GB">16
(Wennerlind 2003, 234), (Binswanger 1994)</span></span></span></span></div>
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<span style="font-size: x-small;"><span style="font-family: "liberation" serif , serif;"><span style="font-size: small;"><span lang="en-GB">17
(Daston 2010)</span></span></span></span></div>
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<span style="font-size: x-small;"><span style="font-family: "liberation" serif , serif;"><span style="font-size: small;"><span lang="en-GB">18
(Fara 2009, 215-218)</span></span></span></span></div>
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<span style="font-size: x-small;"><span style="font-family: "liberation" serif , serif;"><span style="font-size: small;"><span lang="en-GB">19
(Brush 1976, 655)</span></span></span></span></div>
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<span style="font-size: x-small;"><span style="font-family: "liberation" serif , serif;"><span style="font-size: small;"><span lang="en-GB">20
(Christensen 1982)</span></span></span></span></div>
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<span style="font-size: x-small;"><span style="font-family: "liberation" serif , serif;"><span style="font-size: small;"><span lang="en-GB">21
(Clark 2006, 327-344)</span></span></span></span></div>
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<span style="font-size: x-small;"><span style="font-family: "liberation" serif , serif;"><span style="font-size: small;"><span lang="en-GB">22
(Hegel 1952, Secs. 257-258), (Clark 2006, 451)</span></span></span></span></div>
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<span style="font-size: x-small;"><span style="font-family: "liberation" serif , serif;"><span style="font-size: small;"><span lang="en-GB">23
(Hegel 1952, Sec. 317), (Habermas 1991, 120)</span></span></span></span></div>
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<span style="font-size: x-small;"><span style="font-family: "liberation" serif , serif;"><span style="font-size: small;"><span lang="en-GB">24
(Habermas 1991, 119)</span></span></span></span></div>
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<span style="font-size: x-small;"><span style="font-family: "liberation" serif , serif;"><span style="font-size: small;"><span lang="en-GB">25
(Paine 1998, 5)</span></span></span></span></div>
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Tim Johnsonhttp://www.blogger.com/profile/06952723922503939504noreply@blogger.com0tag:blogger.com,1999:blog-3046071861494986299.post-78256529534302140772017-01-07T13:37:00.000-08:002017-01-07T23:18:27.596-08:00Some implications of the Bank of England comparing itself to the MetOfficeAt some point over the Christmas break I was cursing the fact that I was finding it difficult to find a weather map. That is a weather map with <a href="http://www.metoffice.gov.uk/public/weather/surface-pressure/#?tab=surfacePressureColour&fcTime=1483704000" target="_blank">isobars and fronts</a> marked on it not one with <a href="http://www.metoffice.gov.uk/public/weather/forecast/map#?map=SignificantWeather&zoom=5&lon=-4.00&lat=55.01&fcTime=1483747200" target="_blank">icons of cloud, rain and sun</a>. My favourite subject as a final year physics student was Atmospheric Physics: I was fascinated by how the differential equations delivered different weather, particularly cloud formations, based on different inputs. Underpinning this academic interest my father taught me to sail and until I left the oil industry for academia, and lost money and free time as a result, I was a keen sailor. This has left me with the ability to formulate my own idea of the future weather from pressure charts, and my expertise is such that my wife confidently ignores it. Though I find pressure charts more useful than the rain icons, which I believe replace the cloud icon with a rain icon when 26 out of the 50 simulations the MetOffice runs return rain.<br />
<br />
Meteorology also featured in a discussion of "fog" and "mist", on the BBC Radio 4's <a href="http://www.bbc.co.uk/programmes/p04n9z00" target="_blank">Today programme</a>. The meteorologist distinguished the two identical phenomenon in terms of visibility: fog is less than 1,000 m, mist indicates visibility is 1,000m-2,000m and they said terms like "thick fog" or "dense fog" are meaningless. I checked my 1998 RYA Weather forecast book, where it said shipping forecasts do distinguish fog (200m-1000m), thick fog (50m-200m) and dense fog (less than 50m). The distinctions the meteorologist was making come from aviation forecasts and they were ignoring maritime definitions, that describes visibility of 1,000m-2,000m as "Poor visibility", since it can be caused by mist, dust or smoke.<br />
<br />
Two things struck me about these experiences. Firstly the meteorologists definition reflected the relative significance of modern aviation over shipping, the public forecast definitions reflected this change in status, definitions were mutable to social status. The weather map issue is more significant in that the maps it uses today provide the public with "the answer" (there is a 52% chance of rain tomorrow, here is a rain icon that is interpreted as rain) rather than the information to make a judgement. I see this is an example of the transformation of the public sphere, where by a state institution inhibits the public's ability to think and criticise. I think this type of transformation in relation to finance as being core to the lack of faith the public have in finance and the public's inability to knowledgeably criticise finance the root of financial crises.<br />
<br />
A key episode in the transformation of finance was the <a href="https://en.wikipedia.org/wiki/Bank_Charter_Act_1844" target="_blank">1844 Bank Charter Act</a>. This was a consequence of twenty years debate amongst economists on the merits of fixing the relationship between money and gold. The <a href="https://en.wikipedia.org/wiki/British_Currency_School" target="_blank">currency school</a> argued, with the support of statistics, that the easy availability of credit led to inflation and so there should be a link between the, concrete, quantity of gold and the availability of credit. The <a href="https://en.wikipedia.org/wiki/British_Banking_School" target="_blank">banking school</a> argued that financial instability was a consequence of fluctuations in demand and supply and had nothing to do with the networks of banks providing credit by issuing their own notes. This argument was supported by the fact that high, not low, interest rates were associated with periods of inflation. The currency school won the argument and the Bank Charter Act prohibited English banks, other than the Bank of England, from issuing notes and required all banks to hold Bank of England notes as a capital reserve to back up their lending. Banks could still create ‘money’ in bank deposits by lending money, which would be ‘destroyed’ once the loan was repaid but were under the centralised control of the Bank of England.<br />
<br />
In the aftermath of the Bank Charter Act the <a href="http://magic-maths-money.blogspot.co.uk/2016/02/quaker-bankers-building-trust-on-basis.html" target="_blank">Quaker dominance of banking</a> waned. The Act undermined the network of ‘country’ banks that served local businesses and led to the merger and centralisation of the provincial Quaker institutions. Following this centralisation a number of Quakers became associated with financial malfeasance. The most famous example is the failure of Overend, Gurney & Company in 1866. The firm was connected to the Quaker Gurney banking dynasty and had been able to underwrite other banks during a crisis of 1825. Its failure was a result of speculative investing in the 1850s, exposed by the Panic of 1866, and the refusal of the Bank of England to underwrite it. In the distributed financial network that existed before 1844 the stability of the system rested on inter-personal relationships and trust. Quaker doctrine nurtured this trust and produced financial success. After 1844 this stability rested on the centralised decision making of the ‘lender of last resort’. <br />
<br />
On this basis I was interested to hear that Andy Haldane, Chief Economist at the Bank of England had also drawn connections between finance and weather forecasting in a speech hosted by the Institute of Government (the relevant section is initiated at 15:22 and then developed at 18:45 in this video)<br />
<br />
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<iframe allowfullscreen="" frameborder="0" height="360" id="ls_embed_1483801591" scrolling="no" src="https://livestream.com/accounts/5208398/events/6729795/videos/145963063/player?width=640&height=360&enableInfo=true&defaultDrawer=&autoPlay=true&mute=false;start=144&end=158" width="640"> </iframe>
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<br />
Dr Haldane compares economists' failures to foresee the Credit Crisis with the the BBC's lunctime weather forecast of 15th October 1987<br />
<br />
<br />
<iframe allowfullscreen="" frameborder="0" height="270" src="https://www.youtube.com/embed/NnxjZ-aFkjs" width="480"></iframe>
<br />
<br />
Note that the forecaster starts by dismissing the prospect of a hurricane hitting the UK raised by a member of the public. The following day the <a href="http://news.bbc.co.uk/onthisday/hi/dates/stories/october/16/newsid_2533000/2533219.stm" target="_blank">BBC reported a "hurricane" had struck the UK</a> overnight causing the death of 18 people. It is ironic that the BoE looks back to the weather event of 15 October 1987, skilfully passing over Black Monday of 19 October 1987.<br />
<br />
Dr Haldane observes that the accuracy of weather forecasts has improved dramatically since 1987 through the greater use of data and economics could similarly improve (19:53-20:10). I would start of by disputing Dr Haldane's diagnosis and argue it was not greater data (10 weather ships used in the 1970s have been replaced by <a href="http://www.metoffice.gov.uk/public/weather/marine-observations/#?tab=marineObsMap" target="_blank">18 weather buoys</a>) that lead to the improved forecasts but greater <a href="http://www.metoffice.gov.uk/news/in-depth/supercomputers" target="_blank">computational power</a> that has allowed finer scale simulations of the differential equations that has delivered the better precision. Whether or not the improvement in forecast accuracy is down to greater data or greater computational power the underlying assumption is that the economy, like the weather, is a system that can be represented by a set of differential equations that can be used to simulate the evolution of the economy. This is a massive assumption.<br />
<br />
Both Aristotle and Cicero recognised that it was feasible to predict natural phenomena, like the weather but events subject to human agency were impossible to foresee. Augustine agreed that humans were not able to foresee the future though the Christian God, unlike the pagan gods, had perfect fore-knowledge. The change in attitude begins with Descartes search for certainty that involved applying the deductive reasoning presented in Euclid's <i>Elements</i> to non-mathematical thinking starting from the ‘common notion’ “I think therefore I am”. This resulted in Descartes seeking mechanical, logical, explanations for natural phenomenon, rather than the teleological ones of Aristotle. Because different objects had different ends, Aristotle believed there were distinctive sciences to account for different phenomenon. Descartes, in contrast, believed in a unified science and he likened his whole philosophical programme to a tree whose roots were in metaphysics while its trunk was made up of mathematics ‒ “on account of the certitude and evidence of [its] reasoning” ‒ and physics with the branches of the tree being the practical sciences, both natural and moral. Both Dr Haldane's association of economics and meteorology, a consequence of a belief in unified science, and his search for certainty, revealed (19:41-19:48) by his admiration of precision in weather forecasts, reflect a commitment to Cartesian science.<br />
<br />
<br />
The alternative to Descartes has traditionally been Locke who dismissed the Cartesian belief that there are innate ideas, rather people are born with minds that are blank-sheets: <i>tabula rasa</i>. Locke argued that knowledge came from experience with sense organs first perceiving events in the real world and then the mind interpreting them to form ideas. The validity of an idea did not depend on how it conformed to some authority, theoretical or political, but on the origins of idea and how had it evolved: its genealogy. This meant that people needed to investigate the origins of their beliefs, reflecting a Puritan upbringing. For Locke the purpose of philosophy was to show how the <i>tabula rasa</i> was filled with knowledge, which is “the perception of the agreement” of two ideas. In contrast to Descartes Locke argued that human knowledge could never be certain. One might observe the Sun rising every morning of our lives and infer it will do the same tomorrow, but we cannot assume it is true and this motivates us to ask ourselves why the Sun rises. Locke finished the <i>An Essay concerning Human Understanding</i> by dividing knowledge into three types. The first is <i>physica</i>, the nature of things. The second is <i>practica</i>, what people should do as rational and wilful agents. The final type is <i>semeiotika</i> (Greek for ‘signs’), how <i>physica</i> and <i>practica</i> are attained and communicated.<br />
<br />
Locke applied these ideas to politics in his <i>Two Treatises of Government</i>. As a Puritan who had lived through the Civil War, Commonwealth and Restoration, Locke had been concerned with the fundamental tension between an individual’s right to sincerely express their religious beliefs and the need for a well ordered society to mandate the restriction of those rights, such as by a sovereign’s exercise of prerogative powers. Locke argued that a state was made up of autonomous individuals ruled by rationally constituted, abstract and universal laws rather than by subjects enforced to comply with the personal decrees of monarchs.<br />
<br />
While Descartes philosophy can be caricatured as being based on doubt, Locke’s can be characterised as focusing on trust with Locke claiming that language was important because it enabled promises to be made , which created the trust that bound a society together. Since knowledge was fallible reliable knowledge could only be based on trust, faith is only necessary in the presence of doubt, while a stable political system relied on people making and keeping promises and abiding by contracts. Locke opposed atheism because it dissolved trust by undermining individuals’ commitment to truth telling, promise keeping and consideration for others.<br />
<br />
Locke's influence was persistent. The tripartite separation of knowledge into <i>physica</i>, <i>practica</i> and <i>semeiotika </i>was mirrored in Kant's tripartite <i>Critique of Pure Reason</i>, <i>Critique of Practical Reason</i> and <i>Critique of Judgement</i>. Laplace’s reputation in mathematics was built on two parallel pairs of books: <i>Mécanique Céleste</i> (1799-1825) and <i>Exposition du système du monde</i> (1796) describing the mathematics of <i>physica</i> to a technical and general audience, while <i>Théorie analytique des probabilités</i> (1812) and T<i>héorie des probabilités</i> (1819) did the same for the mathematics of <i>practica</i>. <br />
<br />
Descartes view of a certain, unified science came to dominate during the nineteenth century. Descartes' ideas had been developed by Spinoza who's <i>Deus sive natura</i>,
‘God or nature’, indicated that there was only a single substance that,
when viewed from one perspective is nature but from another is God.
This solved the problem of how Descartes’ mind interacted with matter at
the cost of prohibiting contingency, because if everything is connected
to God, it cannot happen randomly. Spinoza argued that people believe themselves to
possess free-will and have autonomy because, being only finite, they do not see the complete
picture. The purpose of human rationality was to
come to understand the true nature of God, the laws of nature. Spinoza
believed that at the most basic level people have direct knowledge of
nature through their senses. This can be improved into a scientific
knowledge of the world that could identify connections between phenomena
and so was able to make generalisations. The ultimate aim was to have
direct knowledge of the generalisations, not mediated by ‘finite’ ideas
or concepts and this ‘third type’ of knowledge delivered true freedom.
Spinoza saw the purpose of the individual as to lift themselves out of a
mundane perspective in order to comprehend the totality of creation. Spinoza's
objective, described in his <i>Ethics</i>, presented in the Euclidean style, was of attaining a 'God-like' perspective was picked up by the
German Romantics and resulted in the Idealists assuming a deterministic outlook across a unified science.<br />
<br />
Dr Haldane refers to a "methodological mono-culture" in economics (16:29-16:31). I think that the mono-culture is not a specific to neo- or
new-Keynesianism or Marxism etc. etc. but to the fact that they are all based on the Cartesian tradition that results in 'rationality' coming to signify a
commitment to deterministic certainty.<br />
<br />
I suspect Dr Haldane would regard these points as reading a little too much into what he has said in an informal setting, in much the same way a patient may dismiss a line their psychiatrist takes. However, I think the distinction between a Lockean and Cartesian approach to economic policy making is fundamental to the issues the BoE is facing up to. Consider the issue of market liquidity. For most of the period since 1700 liquidity, the ability to transact at will, had been associated with a person's credit, Defoe discussed it frequently. A person's credit was based on their trustworthiness and the financial system was founded on believing 'promises to pay'. Today much of the research on liquidity, some of it funded by the BoE, seems to see 'liquidity' as a utility that is the responsibility of the regulator. This tends to focus on defining the capital reserves of institutions, based on the assumption that the economy is a deterministic system, and ignores the Lockean issue of trust. I suspect these points have broader relevance in the whole issue around "post-truth" politics: people who think there is an issue seem to have lost the faith of the public.<br />
<br />
Some post-scripts:<br />
<br />
<ol>
<li>Proofs that the economy is not deterministic are fairly straight forward to construct. Locke and Spinoza would agree that peoples' beliefs are formed by their experiences and inform their decisions. Hence, whether or not a person has a conversation with another determines the future. The economy can only be predictable if individual interactions are predictable. This is only possible if all peoples deaths are predictable, which is not the case since earthquakes and hurricanes are not predictable. It might be admirable to aspire to identifying the equations that represent the economy and amass the data, but in the meantime I think it would be better to focus on what is important and achievable in an uncertain world, such as restoring public trust in economics.</li>
<li>It might seem odd that a mathematician is sceptical about the Euclidean method. Most mathematicians appreciate that a proof of a theorem starts at the result and the process of working out what is required to deliver the proof. This approach to organising science was the great contribution of the ancient Greeks and was rooted in Platonic Forms, which needed to be the foundations of knowledge. This fact about Euclid was not really appreciated until Frege in the 1880s and resulted in Descartes belief in innate ideas and justified Kant's synthetic a priori truths. Its a great way of 'proving' the conclusion you want to, with Hobbes being the first great exponent.</li>
<li>An interest. I submitted a grant application to the BoE in spring 2016 for funds to model, mathematically, the effect that trust might have on the resilience and effectiveness of financial networks. It was declined. </li>
</ol>
Tim Johnsonhttp://www.blogger.com/profile/06952723922503939504noreply@blogger.com6tag:blogger.com,1999:blog-3046071861494986299.post-77347474861577935972016-02-08T02:24:00.002-08:002016-02-08T02:33:58.363-08:00Quaker bankers: building trust on the basis of sincerity, reciprocity and charity<div align="justify" style="line-height: 150%; margin-bottom: 0.49cm; margin-top: 0.49cm; orphans: 2; widows: 2;">
This post follows discussions of the norms <a href="http://magic-maths-money.blogspot.com/2016/01/sincerity-subjective-rationality-of.html" target="_blank">sincerity</a>, <a href="http://dx.doi.org/10.1007/s10551-014-2257-x" target="_blank">reciprocity</a> and <a href="http://magic-maths-money.blogspot.com/2015/12/why-did-shakespeare-portray-merchant-of.html" target="_blank">charity</a> in financial markets. It suggests that the success of Quaker finance, that funded the British Industrial Revolution (the <a href="https://en.wikipedia.org/wiki/Abraham_Darby_I" target="_blank">Darby</a>'s of Coalbrookdale, the <a href="https://en.wikipedia.org/wiki/Stockton_and_Darlington_Railway#Origins" target="_blank">Stockton and Darlington Railway</a>) was based on trust built on the norms. A full argument is in a working paper <i><a href="http://ssrn.com/abstract=2727739" target="_blank">Discourse Ethics for Debt Markets</a></i>.</div>
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<span style="line-height: 150%;">Trust is defined as “a firm belief in the reliability, truth or
ability of someone”. Accounts of how trust is developed vary,
however they involve terms connected to sincerity, such as: honesty,
integrity, credibility, predictability, dependability and
reliability; terms connected to reciprocity, such as: judgement and
fairness; and terms related to charity, such as: benevolence,
goodwill and responsibility (Seppänen et al., </span><span style="font-family: "times new roman" , serif; line-height: 150%;"><span lang="en-GB">2007</span></span><span style="line-height: 150%;">:255).
Essentially, the synthesis of the norms sincerity, reciprocity and
charity, can be seen as the basis of trust in commerce and our
argument reduces to: finance relies on trust, which is built on the
three norms. This might be regarded as naïve and trust a nebulous
concept. However Quakerism represented in the names Barclays, Lloyds,
Cooper, Waterhouse and Peat in connection with banking and
accountancy offer testament to its concrete practicality.</span></div>
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The Quakers emerged as a non-conformist Christian sect during the
English Civil War (1642‒1651) and became an important expression of
independent (not Anglican/Episcopalian or Presbyterian) faith during
the Commonwealth. The sect was ‘comfortably bourgeois in character’
and egalitarian, promoting the rights of women and would lead the
Abolitionist movement in the nineteenth century. With the Restoration
of Charles II (1660) the Quakers were suppressed and it was during
the period of persecution during that the Quakers became the dominant
independent church, accounting for around 1% (60,000) of the English
population in 1680.
</div>
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The growth of Quakerism, while other independent sects founded on
charismatic leaders disappeared, can be explained by how the sect was
organised. Quakerism was distinctive from Anglicanism and
Presbyterianism in rejecting a priesthood (appointed or elected) and
the particular authority of the Bible. To fill the void of dogma, a
system emerged where the central ‘Meeting House’ issued <i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">Queries
</span></span></i>to individual Meetings on a regular basis,
enquiring about ‘the state of the society’ and posing specific
questions to the congregations. The replies were reviewed and <i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">Advices
</span></span></i>issued defining Quakerism: doctrine, holding the
community together, was developed in a discursive manner that was
able to react quickly to events (Walvin, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">1998</span></span>:24‒26).
</div>
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On this basis the “Quaker success story” (Prior and Kirby, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2006;
</span></span>Roberts, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2003</span></span>)
in finance was built. It could be that the financial prominence of
the Quakers was a consequence of their ‘Protestant work ethic’
and frugality, which delivered unconsumed surpluses that they were
able to re-invest. However, other Protestant sects were equally
frugal but did not have the disproportionate influence on finance
that the Quakers had.
</div>
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Being a Quaker meant adhering to the regulations collected in the
<i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">Advices</span></span></i>,
in return a Quaker businessmen could rely on the support of the whole
community. Quakers were required to account for themselves and to
monitor each other, this lead them to rely on written records that
testified to individuals’ conformity to the <i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">Advices
</span></span></i>and the development of networks of communities
based on letters and libraries (Prior and Kirby (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">2006</span></span>:117‒121);
Walvin (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">1998</span></span>:46‒47)).
In business, Quakers were expected to consult with more experienced
‘mentors’ before engaging in activity that required borrowing.
Moreover they were scrupulous, like Antonio, in repaying debts during
a time characterised by high levels of default (Prior and
Kirby (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">2006</span></span>:121‒129);
Walvin (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">1998</span></span>:55‒57)).
</div>
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The Quaker commitment to the repayment of debts highlights their
commitment to reciprocity. Sincerity was a consequence of their
doctrine of simplicity. This ranged from simplicity in appearance,
which inhibited consumerism, to simplicity ‒ honesty ‒ in speech.
Quakers
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detested that which is common, to ask for more goods than the market
price, or what they may be afforded for; but usually set the price at
one word (Walvin, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">1998</span></span>:32)</blockquote>
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Quaker’s were renowned for their charity (Cookson (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">2003</span></span>);
Walvin (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">1998</span></span>:81‒90))
and the norms sincerity, reciprocity and charity are captured in
their approach to lending, encapsulated in their proverb
</div>
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“Well, Friend”, said the Quaker Banker, “Tell me the answers to
these questions so that I may help you in your projects, for you have
opportunities: Firstly, how much do you seek to borrow? For how long?
And how will you repay the loan plus its interest?” These are the
issues all good bankers must explore.</blockquote>
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The Quaker experience suggests that the culture of sincerity
(commitment to truthfulness), reciprocity (commitment to fair pricing
and repaying debts) and genuine care for others generated a robust
financial network that was able to fund the growth of the British
economy between 1700 and 1850. Quaker influence waned towards the end
of the Industrial Revolution in the mid-nineteenth century. The 1844
Bank Charter Act undermined the network of ‘country’ banks that
served local businesses and lead to the merger, and centralisation,
of the provincial Quaker institutions. In the aftermath of this
centralisation a number of Quakers became associated with financial
malfeasance. The most famous example is the failure of Overend,
Gurney & Company in 1866. The firm was connected to the Quaker
banking dynasty, the Gurneys, and for the first half of the
nineteenth century dominated the discounting of Bills and was able to
underwrite other banks during the Crisis of 1825. Its failure was a
result of speculative investing in the 1850s exposed in the Panic of
1866 and the refusal of the Bank of England to underwrite it. In the
distributed financial network before 1844 the stability of the system
rested on inter-personal relationships and trust, the Quakers’
doctrine nurtured trust and on it rested their financial success.
After 1844 the stability rested on the centralised decision making of
the ‘lender of last resort’.
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In the pursuit of efficiency, banks, both retail and commercial, have
replaced personal relationships with clients by automated systems in
the loan approval process. A retail bank will employ dozens of models
to convert data on a customer into a loan decision (only a dozen or
so models are used in commercial lending). This has seen the
emergence of the ‘credit risk modelling’ profession that
develops, maintains and interprets the algorithms.
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While many models appear to use the same data to make similar
decisions they often deliver contradictory results. Lending managers,
confronted with a diversity of results, tend to focus on a single
model to deliver ‘objective truth’ without investigating why
others deliver different answers. Founded on algorithms, the process
cannot be sincere (it can be objective/reciprocal) and as a
consequence the borrower and lender are alienated. The bank’s task
is to optimise the ‘harvesting’ of loans and is devoid of
charity.
</div>
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Financial institutions understand that using data from social media,
‘Big Data’, will enhance the algorithms, but are prevented from
doing so by European Union and U.S. legislation. However, ‘the gods
punish us by giving what we pray for’ and, in the event that such
data could be used it is difficult to see how existing banks would
survive in competition with social media platforms that started to
offer loans. This suggests that the survival of existing retail banks
does not depend on their ability to implement new technologies, but
their ability to communicate meaningfully with their clients<sup><span style="font-size: x-small;">1</span></sup>.
</div>
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This account leaves open the problem facing contemporary finance: how
to support a financial culture that nurtures trust in a pluralistic
society, not centred on Quaker doctrine?
</div>
<h3 align="left" class="western" style="line-height: 150%; orphans: 2; widows: 2;">
Notes</h3>
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<sup><span style="font-size: x-small;">1</span></sup><sup><span style="font-family: "times new roman" , serif;"><span style="font-size: x-small;"><span lang="en-GB"><span style="text-decoration: none;">
</span></span></span></span></sup><span style="font-family: "times new roman" , serif;"><span lang="en-GB">Banks
cannot employ ‘machine learning’ because they need to justify
their lending decisions.</span></span>
<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Because
a machine learning algorithm evolves independent of human
interaction, it cannot provide a</span></span>
<span style="font-family: "times new roman" , serif;"><span lang="en-GB">justification.</span></span>
</div>
<h3 align="left" class="western" style="orphans: 2; widows: 2;">
References</h3>
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Cookson, G. (2003). Quaker families and business
networks in Nineteenth-Century Darlington. <i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">Quaker
Studies</span></span></i>, 8(2):119‒140.
</div>
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<span style="line-height: 100%;">
Prior, A. and Kirby, M. (2006). </span><span style="font-family: "times new roman" , serif; line-height: 100%;"><span lang="en-GB">The
Society of Friends and business culture, 1700-1830. In Jeremy, D., editor <i>Religion, Business and Wealth in Modern </i></span></span><span style="font-family: "times new roman" , serif;"><span style="line-height: 20px;"><i>Britain</i></span></span><span style="line-height: 100%;">,
pages 115‒136. Routledge.
</span></div>
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Roberts, H. (2003). Friends in business:
Researching the history of Quaker involvement in industry and
commerce. <i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">Quaker
Studies</span></span></i>, 8(2):172‒193.
</div>
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Seppänen, R., Blomqvist, K., and Sundqvist, S.
(2007). Measuring inter-organizational trust: a critical review of
the empirical research in 1990‒2003. <i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">Industrial
Marketing</span></span></i> <i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">Management</span></span></i>,
36(2):249 ‒ 265.
</div>
<br />
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Walvin, J. (1998). <i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">The
Quakers: Money and Morals</span></span></i>. John Murray. </div>
Tim Johnsonhttp://www.blogger.com/profile/06952723922503939504noreply@blogger.com0tag:blogger.com,1999:blog-3046071861494986299.post-24133506344975902612016-01-22T03:40:00.001-08:002016-01-25T03:20:27.915-08:00Sincerity - the subjective rationality of markets<div align="left" style="line-height: 100%; margin-bottom: 0.49cm; margin-top: 0.49cm; orphans: 2; widows: 2;">
The Vietnamese have a proverb: two women and a duck make a market.
This simple saying highlights the inter-subjective nature of markets,
there is an asset (the duck) who’s price is determined through the
discussion of two subjects.
</div>
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The foundation of this paper is in the claim that financial markets
should be perceived as centres of communicative, as opposed to
strategic, action. This claim rests on recognising a distinction
between markets based on market-makers (in England, ‘jobbers’)
and those based on brokers. A broker, whether an individual or a
firm, makes their money by arranging transactions between buyers and
sellers for a fee; brokers facilitate the strategic action of those
who own property. Most commercial transactions, such as buying
groceries, are facilitated by brokers, such as retail supermarkets;
in the context of financial markets brokers mediate between
‘investors’. Brokers make a living from the commission they
charge for bringing buyers and sellers together. Most general
retailers look for a 100% commission (they charge buyers twice the
price an item is sold for), auctioneers charge sellers and buyers
commissions running 10%-20% each, estate agents charge 0.5%- 3%;
commission rates fall as the value of the asset rises. While a
broker’s commission rate is proportional to the liquidity of the
asset, the absolute commission is lowest on the most liquid assets.
</div>
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Market-makers, sometimes known as ‘dealers’ in the U.S.<a class="western" href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#fn1x0"><span style="color: blue;"><sup><u>1</u></sup></span></a>,
will quote bid prices, at which they will buy an asset, and offer
prices, at which they will sell an asset, without knowing if the
counter-party is seeking to buy or sell the asset (though the
quantity will affect the quoted prices). The market-maker makes a
living through the bid-ask spread: the bid price is always lower than
the offer. The bid-offer spread is highest when liquidity is low and
and market-makers profit when investors are ill-informed and prices
change frequently (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Bagehot</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">1971</span></span>:13)<a class="western" href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#fn2x0"><span style="color: blue;"><sup><u>2</u></sup></span></a>, (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Millo</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2003</span></span>:89),
(<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Carruthers
and Stinchcombe</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">1999</span></span>:Note
14), leaving them open to the accusation that they promote
uncertainty. The general public encounter market-makers in banking,
where banks traditionally make money by lending to and borrowing from
customers at differential rates. This final observation justifies the
focus on market-making in the context of debt markets.
</div>
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Stock-jobbing had a dubious reputation as the English financial
markets emerged in the late seventeenth century. In 1719 Daniel Defoe
wrote <i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">The
Anatomy of Exchange Alley </span></span></i>in which he described
stock-jobbing as
</div>
<blockquote class="tr_bq" style="line-height: 100%; margin-bottom: 0.49cm; margin-top: 0.49cm; orphans: 2; widows: 2;">
a trade founded in fraud, born of deceit, and nourished by trick,
cheat, wheedle, forgeries, falsehoods, and all sorts of delusions;
coining false news, this way good, this way bad; whispering imaginary
terrors, frights hopes, expectations, and then preying upon the
weakness of those whose imaginations they have wrought upon
(<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Poitras</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2000</span></span>:290)</blockquote>
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An observation mentioned by Defoe but more explicitly stated by
Thomas Mortimer in 1761 concerned the type of person involved in
stock-jobbing. Mortimer makes the point that there are three types of
stock-jobber: foreigners; gentry, merchants and tradesmen; and “by
far the greatest number”, people
</div>
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with very little, and often, no property at all in the funds, who job
in them on credit, and transact more business in several government
securities in one hour, without having a shilling of property in any
of them, than the real proprietors of thousand transact in several
years. (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Poitras</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2000</span></span>:291)</blockquote>
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These jobbers did not only trade in vanilla products such as stocks
or bonds. <span style="font-family: "times new roman" , serif;"><span lang="en-GB">Murphy</span></span> (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">2009</span></span>:24-30)
estimates that around 40% of the trades between 1692 and 1695 were in
stock options that were being traded in order to manage the risks of
stock trading: ‘hedging’. Evidence of the widespread use of
options comes in Colley Cibber’s 1720 play, <i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">The
Refusal </span></span></i>(the term for an option at the time)
describing the action in Exchange Alley
</div>
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There you’ll see a duke dangling after a director; here a peer and
‘prentice haggling for an eighth; there a Jew and a parson making
up the differences; there a young woman of quality buying bears of a
Quaker; and there an old one selling refusals to a lieutenant of
grenadiers (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Ackroyd</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2001</span></span>:308)</blockquote>
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The role of stock-jobbers in the U.K. markets became normalised and
an accepted part of the financial system from the late eighteenth
century until 1986 when they disappeared with the ‘Big Bang’
reforms. <span style="font-family: "times new roman" , serif;"><span lang="en-GB">Attard</span></span> (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">2000</span></span>)
reports that at the end of the nineteenth century the number of
jobbers and brokers on the London Stock Exchange were approximately
equal, though the proportion of jobbers increased at times when new
markets emerged. Through the twentieth century the proportion of
jobbers declined: in 1908, at the height of the market before the
collapse of Bretton-Woods there were some 3,300 jobbers to 1,700
brokers; in 1938 there were 1,433 jobbers to 2,491 brokers; in 1961,
697 jobbers to 2,694 brokers. The majority of jobbers worked in small
partnerships of one or two members but the most of the business
passed through a few large firms, such as Akroyd & Smithers, who
‘made’ the market in British government debt.
</div>
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<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Mackenzie
and Millo</span></span> (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">2001</span></span>:19-22)
present a similar picture of the market-makers of the Chicago
exchanges as outsiders with limited reserves while
(<span style="font-family: "times new roman" , serif;"><span lang="en-GB">MacKenzie</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2008</span></span>:142)
describes how the Chicago market-makers were idle in the late 1960s
and a comprehensive account of market-making culture at the Chicago
Board of Trade is given in <span style="font-family: "times new roman" , serif;"><span lang="en-GB">Millo</span></span> (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">2003</span></span>:88-132).
This reveals that while a ‘designated market-maker’ is obliged to
provide bid and offer quotes to a broker the majority of
market-making activity is conducted by market-makers who risk their
own capital as ‘traders’.
</div>
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On this basis we can describe a market made by market-makers as a
discursive arena. A market-maker will make an assertion as to the
price of an asset by giving the market a bid and offer price. If
other traders agree with the bid-offer, they let it pass and do
nothing. If, however, another trader feels the market-maker has
mis-priced the asset, they will act - challenging the assertion - by
executing a trade. Note that the specification of a bid-offer pair by
a market-maker is critical: offering to sell air for <span style="font-family: "times new roman" , serif;"><span lang="en-GB">£</span></span>1,000/kg
would not demonstrate anything, offering to buy air at <span style="font-family: "times new roman" , serif;"><span lang="en-GB">£</span></span>999.95/kg
would be challenged as a mis-pricing. It is through this process,
whereby one market-maker makes a claim as to what is a true price and
then the claim being challenged, that the market seeks to reach an
understanding as to the price of an asset. The process is one where
traders are continually taking yes-no positions to validity claims
implicit in quotes. Central to this process is that the
market-maker’s and dealer’s “manifest intention is <i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">meant
</span></span></i>as it is expressed” (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Habermas</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">1985</span></span>:99)
with the evidence being that they are prepared to act on their
utterances by having ‘skin in the game’ (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Taleb
and Sandis</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2014</span></span>).
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In what followers we shall use the term ‘jobber’, as distinct
from ‘broker’, to refer to an agent acting as a market-market,
trader or arbitrageur<a class="western" href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#fn3x0"><span style="color: blue;"><sup><u>3</u></sup></span></a>:
that is they are concerned with asset pricing as distinct from asset
valuation, which is the aim of investors. We can contrast the markets
mediated by jobbers from the type of markets mediated by brokers,
were commodity owners undertake exchange, by considering an extreme
example of commodity exchange where a central authority sets the
price, such as the Emperor Charlemagne who in the ninth century, at
the start of feudalism, set the ‘just price’ of commodities that
would apply in Bordeaux, Aachen, Salzburg or Lubeck. When Charlemagne
set the price of a good throughout his empire he was setting the rate
at which a commodity would settle a tax debt, rather than relating
the price to supply and demand. This had the effect that merchants
could not move a commodity from an area of abundance to region with a
shortage, which would lead to a certain loss since prices were fixed.
This is a central problem of economics and a focus of much economic
theory is on the allocation of resources across a society.
Neo-liberal economic theory has it that the ‘market’ will achieve
an optimal distribution while Marxists argue that the institution of
private property creates the scarcity and the consequential
power-imbalances enable the bourgeois to exploit the proletariat.
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The issue of the power of the price setter could be resolved by
obliging the price setter to specify not just the price at which a
commodity is brought (or sold) but by obliging them to offer both bid
and offer prices. This is an obvious practical solution but it points
to the central issue: if an authority is only giving a price at which
he is willing to buy a commodity, but not at which he is willing to
sell it, they is being insincere, in the sense that they are being
hypocritical, about the price. By requiring authority to give both
bid and offer prices their power to act arbitrarily is curtailed.
<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Kaye</span></span> (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">1998</span></span>:22-25)
describes how in France in the first decade of the fourteenth
century, after a century of the society’s monetisation, the
authority of Philip IV to set economic affairs was challenged by the
broad public signalling the end of feudalism.
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In a market mediated by jobbers, recorded prices represent, not an
implicit agreement in the price quoted by the market-maker but, an
explicit disagreement in the market-maker’s valuation. This is
because a speculator would only trade with a market-maker if they
believed they would profit at the price quoted and this would only be
the case if the speculator believed the market-maker had mis-priced.
The statement that market prices indicate disagreement appears
incoherent with standard economic theory that argues the market price
is the true price and is discussed in <span style="font-family: "times new roman" , serif;"><span lang="en-GB">Bjerg</span></span> (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">2014</span></span>:24).
Standard economic theory focuses on exchange undertaken by owners of
commodities, in this case it is reasonable to believe that the two
parties can come to some agreement as where the equivalence between
commodities should rest. This type of exchange is dominated by
objective rationality, discussed in the <a href="http://magic-maths-money.blogspot.co.uk/2013/10/reciprocity-as-foundation-of-financial.html" target="_blank">Reciprocity as a Foundationof Financial Economics</a>.
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We make sense of the apparent incoherence of jobber-mediated markets
delivering prices that are disputed by noting that, unlike investors,
jobbers have no commitment to the assets they trade. A jobber gives
prices in much the same manner as a good book-maker - by setting
prices that balance supply and demand and bringing to mind
<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Ramsey</span></span> (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">1931</span></span>:181-183).
Believing that there is an objective value of the asset they are
trading can be detrimental. Market-makers should focus on the
relative volume of buy and sell orders and traders make a subjective
assessment as the veracity of the prices given by market-makers. This
attitude is captured in <span style="font-family: "times new roman" , serif;"><span lang="en-GB">Beunza
and Stark</span></span> (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">2012</span></span>:394)
where it is recorded that terms like buy and sell suggest a
commitment to assets that traders see as a sign of
un-professionalism. It was also understood by the Scholastics, who
recognised that “the individual’s responsibility in economic
activity is effectively eliminated” if finance rests solely on
objective valuations (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Kaye</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">1998</span></span>:98-99).
The difference between broker and jobber mediated markets is
emphasised by the difference between traditional ‘cash-and-carry’
markets, where it is possible to physically hold the asset and
valuations can be regarded as objective, and ‘price discovery’
markets associated with financialisation and where the asset is
intangible and so prices are subjective (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Hirsa
and Neftci</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2013</span></span>:3).
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Financialisation is often presented as a recent phenomenon, alongside
neo-liberalism and globalisation (for example, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">Krippner</span></span> (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">2005</span></span>)),
emerging after the collapse of the Bretton-Woods system of fixed
exchange rates in 1971. However, finance - the science of money - has
eclipsed commodity exchange at a number of times in the history of
western Europe. Money appears in pre-Socratic Greece (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Seaford</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2004</span></span>);
comes to dominate trade in the thirteenth century
(<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Hadden</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">1994</span></span>; <span style="font-family: "times new roman" , serif;"><span lang="en-GB">Kaye</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">1998</span></span>);
and is a significant feature of seventeenth century England and the
Netherlands. These episodes of financialisation are also associated
with the democratisation of politics and the development of ‘western
science’.
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An example of seventeenth century financialisation, closely linked to
globalisation at the time, is given by <span style="font-family: "times new roman" , serif;"><span lang="en-GB">Poitras</span></span> (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">2000</span></span>:274-277)
who describes the emergence of stock trading in seventeenth century
Amsterdam. During this time the trade of ‘duction’ shares was
reported in de la Vega’s <i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">Confusion
de</span></span></i> <i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">Confusiones</span></span></i><a class="western" href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#fn4x0"><span style="color: blue;"><sup><u>4</u></sup></span></a>
(1688). Duction shares had a nominal value of one tenth a Dutch East
India Company (VOC) share but there was no expectation that holding
ten ductions would entitle someone to a VOC share: . Duction shares
appeared because it was impossible for the general public to
participate in speculation on VOC shares, which were held exclusively
by the Dutch elite and their trading incurred significant transaction
costs. Duction trading enabled the public to challenge the VOC
owners’ assessment of the value of the firm and in 1610 the VOC
board petitioned the government to prohibit the sale of shares “in
blanco” (short-selling, signifying the public felt the VOC was
over-valued). The ban was ineffective, and had to be repeated in
1624, 1630, 1636 and 1677. <span style="font-family: "times new roman" , serif;"><span lang="en-GB">de Goede</span></span> (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">2005</span></span>)
discusses the similar phenomenon of ‘bucket shops’ that appeared
in the U.S. in the 1870s and enabled the American working class to
speculate on commodity prices without having to incur the cost of
trading through CBOT.
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While many argue that modern (quantitative) finance starts with
Bachelier’s thesis of 1900 (such as <span style="font-family: "times new roman" , serif;"><span lang="en-GB">Bjerg</span></span> (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">2014</span></span>:19),
<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Appadurai</span></span> (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">2015</span></span>:2-3),
<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Roffe</span></span> (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">2015</span></span>:11))
we would argue that Bachelier’s work, and the subsequent,
independent, work of Bronzin (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Zimmermann
and Hafner</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2007</span></span>)
that is much closer to current theory than Bachelier, marks the end
of an era that had included the railway booms and the globalisation
associated with nineteenth century colonisation. Between the closure
of the exchanges at the start of the 1914-1918 War and the collapse
of Bretton-Woods a form of ‘gold-standard’ defined money as a
commodity and after 1945 exchange rates were based on the opinions of
American, British and Frech policy makers. Bretton-Woods collapsed
because the global power balance changed as the German and Japanese
economies grew faster than those of Britain and the U.S. In order to
regulate exchange rates in this new world order governments adjusted
central bank lending rates. In the 26 years between 1945 and autumn
1971, the Bank of England changed its lending rate 41 times, with 30%
of these changes occurring between 1966 and 1971. In the 26 years
after 1971, it changed them 216 times. As exchange rates fluctuated
so did commodity prices. An exemplar is the oil price whose control
passed from the Railroad Commission of Texas to OPEC and ultimately
to the Brent crude futures price, where jobbers on the International
Petroleum Exchange controlling the price muting the owners of the
rights to produce Brent crude. In 1908 and 2008 markets were
dominated by jobbers because their role in ‘price-discovery’ was
necessary in an uncertain world.
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Market-makers gain from investors who are taking strategic decisions
of the <i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">C </span></span></i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">-</span></span><i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">M
</span></span></i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">-</span></span><i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">C
</span></span></i>type but lose out to ‘informed traders’ engaged
in <i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">M </span></span></i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">-
</span></span><i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">M</span></span></i><span style="font-family: "symbol" , serif;"><span lang="en-GB">''</span></span>
type speculation (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Bagehot</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">1971</span></span>:13).
<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Brenner
and Brenner</span></span> (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">1990</span></span>:91)
argue that ‘investors’ are preoccupied with future scarcity and
so defer income. Because uncertainty exposes the investor to the risk
of loss, investors wish to minimise uncertainty at the cost of
potential profits, this is the basis of classical investment theory.
‘Gamblers’ will bet on an outcome taking odds that have been
agreed on by society, in a discursive manner as in sporting bets, or
based on stable statistics, as in roulette. ‘Speculators’ bet on
a mis-calculation of the odds quoted by society and the reason why
speculators are regarded as socially questionable is that they have
opinions that are explicitly at odds with the consensus (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Beunza
and Stark</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2012</span></span>:394).
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Gambling is today regarded as profane, but this was not always the
case. For the Greeks, the brothers Zeus, Poseidon and Hades cast lots
to divide up the universe. The Hindus believe the world was a game of
dice played between Shiva and his wife and at the heart of the epic
tale <i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">Mahabharata
</span></span></i>is an, unfair, dice game between the Kauravas and
the Pandavas ((<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Sahlins</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2003</span></span>:27),
(<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Brenner
and Brenner</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">1990</span></span>:1-5)).
Divination by casting lots played an important role in Judaism and
the Bible refers to the ‘judgement’ of <i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">Urim
</span></span></i>and <i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">Thurim</span></span></i>,
which were probably two dice (Exodus 28:30, Leviticus 27:20-21,
Samuel I 14:41). Gambling was often associated with sacrificial
practises that were widespread and are generally known by their
Native American name, <i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">potlach
</span></span></i>((<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Keynes</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">1936</span></span>:17-19),
(<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Graeber</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2011</span></span>:56)).
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The role gambling plays in archaic societies has been studied by
<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Altman</span></span> (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">1985</span></span>)
and <span style="font-family: "times new roman" , serif;"><span lang="en-GB">Mitchell</span></span> (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">1988</span></span>).
Altman studied an Australian aboriginal group that had access to
social security payments and there was often a surplus left over
after essentials had been bought. However, some individuals were
excluded from social security payments by the government and there
was an “inter-household variability in access to cash”. The
community regarded this variability as a subjective discrimination by
the Australian government and gambling “acted effectively to both
redistribute cash †[and] provided a means for people with no access
income to gain cash” (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Altman</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">1985</span></span>:60-61).
This was important in non-hierarchical communities because it meant
that one arbitrary bestowal of money was not corrected by another
subjective distribution, such as redistribution by a chief. Mitchell
considered the role that gambling plays in disrupting hierarchical
social structures, such as the Indian caste system, by studying the
Wape, a Sepik community in New Guinea, and concluded that their
non-hierarchical society was maintained through gambling. The
pervasive nature of gambling in archaic communities can be explained
as it is an objective, ‘fair’, mechanism for the redistribution
of wealth (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Sahlins</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2003</span></span>:27).
What needs to be recognised is that this process remains valid only
so long as no single entity accumulates enough wealth that it can
bankrupt all the others.
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Gambling had been outlawed in the medieval period, usually because
time spent gambling could be better used (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Brenner
and Brenner</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">1990</span></span>:58).
However, building on Roman practice, lotteries began to be used as
means of raising public-finance in the later Medieval period. The
first private lottery appeared in the sixteenth century in Italy and
the mechanism spread to France and England (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Brenner
et al.</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2008</span></span>:133-138)
culminating in ‘The Million Adventure’ lottery set up by the
English government and drawn in November 1694 (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Murphy</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2009</span></span>:34).
In the seventeenth century, William Petty, observed that lotteries
were “a tax upon unfortunate, self-conceited fools” and from the
start of the eighteenth century gambling became increasingly
associated with “the waste of time and money; the neglect of
familial and business duties; the erosion of social trust; and the
severed link between hard work, talent and gain.”
(<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Daston</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">1998</span></span>:161).
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<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Brenner
et al.</span></span> (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">2008</span></span>:98-104)
argue that the de-legitimisation of lotteries, and gambling in
general, comes about because during the seventeenth and eighteenth
centuries there was significant social and economic change. In this
environment gambling and speculation provided the ‘lower classes’
with a means to climb up the social ladder . While the lotteries
enabled this disruptive social mobility, they were a necessary tool
of public finance that prevented the stagnation and crises suffered
by states reliant on taxation (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Nash</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2000</span></span>).
By the start of the nineteenth century, finance had developed to such
an extent that governments could tax more effectively, notably the
incomes of the middle classes, or to borrow from the middle and upper
classes. In 1808 the British Parliament set up a committee to
“inquire how the evils attending Lotteries have been remedied by
the laws passed”. The parliamentarians concluded that, despite the
fact that the British government was still raising money through
lotteries, “the foundation of the lottery system ...under no
...regulations ...will it be possible ...[to] divest it of ...evils”
(<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Brenner
and Brenner</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">1990</span></span>:12).
The status of lotteries was changing and in 1823 they were outlawed,
with the last draw taking place in 1826, the working classes were
excluded from the opportunities to get rich that participating in
public-finance, by purchasing lottery tickets, provided. .
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<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Daston</span></span> (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">1998</span></span>:172-174)
argues that usury prohibitions inhibited the use of mathematics in insurance and for much of the
seventeenth and eighteenth century life-insurance provided people
with the opportunity to gamble on the lives of others. The first
life-insurance fund to be managed on the basis of mathematics was the
Scottish Ministers’ Widows Fund established in 1744 (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Hare
and Scott</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">1992</span></span>).
The model was copied in the Presbyterian’s Ministers Fund of
Philadelphia in 1761 and the following year the English Equitable
Company was founded. Mathematics and life-tables would enable the
emerging middle-classes to provide, responsibly and prudently, for
their families in the event of their death. By the end of the century
‘gambling’, in the form of insurance, had become a legitimate
practice if based on rational foundations
(<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Zelizer</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">1979</span></span>; <span style="font-family: "times new roman" , serif;"><span lang="en-GB">Daston</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">1987</span></span>)
and in 1774 the Life Assurance Act distinguished between legitimate
insurance and illicit gambling and became known colloquially as the
Gambling Act.
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The prohibitions on gambling had an important impact on the
development of finance. In 1851, following a dispute between two
counterparties in a forward contract, English law established that
there needed to be ‘intent to deliver’ for a derivative to avoid
being classed as an illegitimate gamble (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Swan</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">1999</span></span>:211-213);
the only legitimate exchange was of the <i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">C
</span></span></i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">-
</span></span><i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">M
</span></span></i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">-
</span></span><i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">C</span></span></i>
type, <i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">M </span></span></i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">-
</span></span><i><span style="font-family: "times new roman" , serif;"><span lang="en-GB">M</span></span></i><span style="font-family: "symbol" , serif;"><span lang="en-GB">''</span></span>
of the duction trade and ‘bucketshops’ was illegitimate. While
English courts generally avoided becoming involved in the derivative
markets, U.S. courts were much more active in restricting speculative
behaviour and were vigorous in prosecuting “idlers who made profit
even while they slept” (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">de Goede</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2005</span></span>:62,
quoting Fabian) by speculating in bucketshops rather than the
“competent men” of CBOT engaged in “the self-adjustment of
society to the probable”, as the U.S. Supreme Court ruled in 1908
(<span style="font-family: "times new roman" , serif;"><span lang="en-GB">de Goede</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2005</span></span>:71).
We stress how the Supreme Court ruled that only an elite could
speculate on the markets just as they prevented the poor from betting
on horse-racing by only allowing on-course betting relate these
observations to <span style="font-family: "times new roman" , serif;"><span lang="en-GB">Levy</span></span> (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">2012</span></span>)’s
account of the alienation of the public from financial risk by U.S.
corporations at the end of the nineteenth century.
</div>
<div align="left" style="line-height: 100%; margin-bottom: 0.49cm; margin-top: 0.49cm; orphans: 2; text-indent: 0.64cm; widows: 2;">
The strict prohibitions persisted into the late twentieth century and
in 1968 CBOT consulted lawyers about offering an index future, but
had been told it would probably be ruled as illegal. While
commodities, including stocks and bonds, could be delivered, the
‘index’ could not (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">MacKenzie</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2008</span></span>:145).
The publication of the Black-Scholes equation, where all the
variables were ‘known’, removed uncertainty in pricing options
and meant derivatives trading was not gambling, it was, like
insurance, ‘scientific’. In similar circumstances, in 1997 the
International Swaps and Derivatives Association (ISDA) sought the
advice of an English barrister as to the regulatory status of Credit
Default Swaps (CDS): the ‘Potts Opinion’. The issue was two fold:
on the one hand iff CDS were insurance contracts they would be
regulated by strict insurance law while if they were wagers, they
would be subject to gambling legislation. A CDS is a contract where
by a protection buyer pays a regular premium to a protection seller
over a fixed period. If the contract underlying the CDS defaults (a
strictly defined term that goes beyond fails to pay) then the
protection seller pays a specific amount and the contract ceases.
Potts argued that, since the amount the protection buyer receives is
independent of the loss they incur and the related feature that
protection buyers do not need to have an interest in the underlying,
the CDS is not an insurance contract. The CDS is not a ‘wager’
since the protection buyer and seller do not hold opposite views of
whether the underlying will default or not: there is no winner or
loser.
</div>
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The Bible suggests that humans suffer because they were expelled from
the Garden of Eden into a world of scarcity. The thirteenth century
rabbi, ben Maimon (Maimonides), argued that God’s punishment was
not so much about scarcity but uncertainty. In the Garden of Eden
humans had perfect knowledge, which was lost with the Fall and it is
the loss of this knowledge which is at the root of suffering: if we
know what will happen we can manage scarcity (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Perlman</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">1997</span></span>).
Classical economics seems to hold an implicit assumption that the
price of a commodity can be known. Sometimes in economics uncertainty
comes to dominate and during these periods the central problem facing
markets is how to price an asset whose prospects are radically
uncertain. <span style="font-family: "times new roman" , serif;"><span lang="en-GB">Keynes</span></span> (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">1921</span></span>:321-322)
recognised this when he observed that the largest class of problems
in economics were not reducible to the conventional concept of
probability: the problem is one of ontology, numerical probability
economic events in the future does not exist. <span style="font-family: "times new roman" , serif;"><span lang="en-GB">Ramsey</span></span> (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">1931</span></span>:181-183)
criticised Keynes’ rejection of mathematical probability by
introducing the ‘Dutch Book’ argument (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Hájek</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2008</span></span>)
that argues probabilities (which are proxies for prices) can be
ascertained in a market-mechanism: Ramsey argues for a subjective
view of probability and that “Having any definite degree of belief
implies a certain measure of consistency”, or sincerity.
</div>
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We offer the conjecture that at times of economic uncertainty, such
as when new markets are being established through either
globalisation or technology, jobbers become essential in discovering
prices through a discursive process that rests on sincerity. At such
times we cannot rely on enlightened authority to value assets and
must involve speculative traders in setting prices: it is a co-operative process as defined by <span style="font-family: "times new roman" , serif;"><span lang="en-GB">Gide</span></span> (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">1898</span></span>).
This conjecture seems to be aligned to <span style="font-family: "times new roman" , serif;"><span lang="en-GB">Sotiropoulos
et al.</span></span> (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">2013</span></span>)
where it is argued that profits made in the presence of uncertainty
need not be exploitative.
</div>
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The pragmatic maxim demands we consider the practical consequences of
our assertions. To this end we consider the claim that sincerity is
fundamental to successful markets by examining the practice of ‘order
stuffing’ on electronic exchanges, the status of Credit Default
Swaps (CDS) and the role of Collateralised Debt Obligations (CDO) in
the Credit Crisis of 2007-2088.
</div>
<div align="left" style="line-height: 100%; margin-bottom: 0.49cm; margin-top: 0.49cm; orphans: 2; text-indent: 0.64cm; widows: 2;">
The two women in the Vietnamese proverb do not require the mediation
of a broker but in this situation we can presume, because the owner
of the duck is not specified, that the price is a sincere price at
which the women would both buy and sell the duck. Modern markets,
whether financial or consumer, where technology facilitates the
matching of buyers and sellers for a relatively small fee, appear to
follow this model. However in the domain of High Frequency Trading
the practice of ‘order stuffing’, issuing large numbers of orders
to an exchange and then cancelling them within a tenth, often a
hundredth, of a second is widely regarded as being an attempt to
manipulate the market. While acknowledging this concern, the UK
Government Office for Science has not advised that any legislation
should be enacted in order to prevent the practice. They argue that
there is a competitive market in exchanges, and legislation would
discourage trading on the UK exchanges (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Foresight</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2012</span></span>,
Section 8.2). This fails to appreciate lessons of the LIBOR
manipulation scandal, that sincerity is foundational to the markets,
and submitting and then cancelling orders signifies a lack of
sincerity.
</div>
<div align="left" style="line-height: 100%; margin-bottom: 0.49cm; margin-top: 0.49cm; orphans: 2; text-indent: 0.64cm; widows: 2;">
The Potts Opinion is not in the public domain and so we cannot be
certain of its full purpose but what is apparent is that his argument
seeks to legitimise the pricing of credit risk through jobbers rather
than brokers, whether ratings agencies or brokers. This means that
‘informed traders’ are able engage in discourse about the
liklihood of credit defaults in the future, rather than limit the
discussion to investors with vested interests. Some claim that
because CDS are so like insurance contracts they should be treated as
insurance contracts, in particular that not requiring a CDS
protection buyer to have an economic interest in the underlying
creates moral hazard. <span style="font-family: "times new roman" , serif;"><span lang="en-GB">Kimball-Stanley</span></span> (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">2009</span></span>:253-261)
gives a number of reasons for re-classifying CDS but none of them is
convincing<a class="western" href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#fn5x0"><span style="color: blue;"><sup><u>5</u></sup></span></a>
and all overlook the negative impact insurance companies, such as
AIG, and ratings agencies had in the Credit Crisis of 2007-2009.
</div>
<div align="left" style="line-height: 100%; margin-bottom: 0.49cm; margin-top: 0.49cm; orphans: 2; text-indent: 0.64cm; widows: 2;">
With regard to the Credit Crisis in general, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">MacKenzie</span></span> (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">2011</span></span>:1811)
makes the point that the financial instruments at the heart of the
crisis were not priced using the jobber mediated “canonical-mechanism
market”. Valuations were based on ratings provided by agencies paid
by the producer of the financial instruments (a broker mediated
model) and mathematical models using parameters based on unrelated
markets. Because these parameters meant the models pointed to
arbitrage profits, they were widely used with only a few exceptions
(<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Tett</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2009</span></span>:148-151).
This example leads us to distinguish to cases of financialisation.
There is the one discussed in the previous section where by jobbers
price in the abstract and apply subjective judgement. There is a
second where ‘quants’ abstract and employ algorithms and data,
what might be described as objective judgement, in a strategic
manner. The second form of abstraction failed, as most experienced
traders believed it would (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Tett</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2009</span></span>; <span style="font-family: "times new roman" , serif;"><span lang="en-GB">Triana</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2009</span></span>; <span style="font-family: "times new roman" , serif;"><span lang="en-GB">Haug
and Taleb</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2011</span></span>; <span style="font-family: "times new roman" , serif;"><span lang="en-GB">Duhon</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2012</span></span>).
From a mathematical point of view the failure of the models was in
their instrumental use; the legitimate use of mathematical models is
to develop a clearer understanding of what can be inferred about
market sentiment from jobber-mediated market prices so that trading
decisions can be taken ((<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Johnson</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2011</span></span>);
(<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Beunza
and Stark</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2012</span></span>:384-385);
(<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Duhon</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2012</span></span>:265-277)).
</div>
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We can conclude that some form of jobber-mediated market mechanism,
based on sincere discourse about prices in an uncertain environment,
is essential for markets to perform as they are expected to. The
<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Committee
on the Global Financial System</span></span> (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">2014</span></span>)
of the Bank for International Settlements has observed a decline in
market-making activity that is regarded as problematic. They argue
that regulation has reduced the ability of jobbers to provide
liquidity - by taking on risk - and this liquidity gap will have
broader economic consequences. This raises a question: why does
economic theory advocate market liquidity?
</div>
<div align="left" style="line-height: 100%; margin-bottom: 0.49cm; margin-top: 0.49cm; orphans: 2; text-indent: 0.64cm; widows: 2;">
Liquidity represents the ease with which an asset can be traded. The
economic justification is that it enables investors to trade as and
when they wish, it gives them a sense of control, market risk has
been tamed (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Bernstein</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">1998</span></span>)
by the investors ability to dynamically hedge, which rests on the
market being liquid. Furthermore, the investor wants to,
simultaneously, be able to exchange, implying a shift in supply and
demand, without changing the price. Illiquid financial markets
involve wider bid-ask spreads, or higher absolute commissions,
representing higher transaction costs and less certainty that the
market price is an accurate reflection of the asset’s value.
Liquidity is an essential assumption of the Efficient Markets
Hypothesis (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Fama</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">1970</span></span>)
where it is taken that the “primary role of the capital market is
allocation of ownership” and so prices must “provide accurate
signals for resource allocation”.
</div>
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The instrumental, as distinct from the epistemic, use of mathematics
in finance to hedge and earn arbitrage profits relies on markets
being liquid. Canonical failures in recent finance, such as
Metallgesellschaft AG in 1993, the hedge fund Long Term Capital
Management (LTCM) in 1997 (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">MacKenzie</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2008</span></span>:233-239)
and during the Credit Crisis (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Brunnermeier</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2009</span></span>)
all relate to financial strategies that failed because liquidity
disappeared. This is not a modern phenomenon, in 1706 Defoe explained
the liquidity problem in the debt markets in this description of
‘Lady Credit’
</div>
<blockquote class="tr_bq" style="line-height: 100%; margin-bottom: 0.49cm; margin-top: 0.49cm; orphans: 2; widows: 2;">
Money has a younger sister, a very useful and officious Servant in
Trade ... Her name in our Language is call’d CREDIT ... </blockquote>
<blockquote class="tr_bq" style="line-height: 100%; margin-bottom: 0.49cm; margin-top: 0.49cm; orphans: 2; widows: 2;">
This is a coy Lass ...a most necessary, useful, industrious creature:
...a World of Good People lose her Favour, before they well know her
Name; others are courting her all their days to no purpose and can
never come into her books. </blockquote>
<blockquote class="tr_bq" style="line-height: 100%; margin-bottom: 0.49cm; margin-top: 0.49cm; orphans: 2; widows: 2;">
If once she is disoblig’d, she’s the most difficult to be Friends
again with us (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">de Goede</span></span>, <span style="font-family: "times new roman" , serif;"><span lang="en-GB">2005</span></span>:28)</blockquote>
<div align="left" style="line-height: 100%; margin-bottom: 0.49cm; margin-top: 0.49cm; orphans: 2; text-indent: 0.64cm; widows: 2;">
The economic role of liquidity can be summarised as in facilitating
the strategic action of investors. Before the Enlightenment liquidity
risk, and related market risk, seem to have been an accepted feature of finance. The ‘instrumental mindsets’ that
came to dominate in the nineteenth century. However, the tools that
control market risk rely on liquidity, and, in the aftermath of the
Credit Crisis, we see an emphasis in the financial and economic on
focusing on ‘liquidity risk’. Under the current regulatory
framework liquidity providers are likely to be highly capitalised
institutions, global investment banks or hedge-funds employing
algorithms, seeking to make a profit. Based on the analysis presented
here, noting <span style="font-family: "times new roman" , serif;"><span lang="en-GB">Attard</span></span> (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">2000</span></span>)’s
observation that most English jobbing firms were small partnerships
risking their personal capital, this approach has two drawbacks.
Firstly, these institutions will not be that heterogeneous and so
susceptible to ‘group think’/‘herding’/‘the superportfolio
effect’: there would not be the pluralism necessary for the
discourse required in price-discovery. Secondly, these institutions
have power and so could come to dictate prices: ‘order stuffing’
is a manifestation of this.
</div>
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In light of this observation we can state the main result of this
section as a question: should society see the principle role of
markets as either; facilitating the strategic action of investors;
or, delivering prices of assets. We note that a market can always
deliver prices, with the bid-ask spread acting as a confidence
interval, but it frequently fails to deliver liquidity.
</div>
<div align="left" style="line-height: 100%; margin-bottom: 0.49cm; margin-top: 0.49cm; orphans: 2; text-indent: 0.64cm; widows: 2;">
These comments suggest regulatory policy should create a clear
distinction between firms undertaking brokerage and those involved in
‘jobbing’, making it explicit which institutions are
‘speculating’ and which are ‘investing’. This implies support
of the ‘Volker rule’ in the U.S. and reversing some of the
regulatory changes associated with the U.K.’s ‘Big Bang’
reforms of 1986. This would address one of the issues that
<span style="font-family: "times new roman" , serif;"><span lang="en-GB">Kimball-Stanley</span></span> (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">2009</span></span>:257-258)
identify: the fact that while one part of Goldman-Sachs was
manufacturing Mortgage Backed Securities (MBS) and selling them to
customers, another part was using the CDS market to speculate on the
value of the MBS falling. The speculators were right and were able to
signal their beliefs by trading in CDS, yet rather than criticise the
process of manufacturing MBS <span style="font-family: "times new roman" , serif;"><span lang="en-GB">Kimball-Stanley</span></span> (<span style="font-family: "times new roman" , serif;"><span lang="en-GB">2009</span></span>)
seeks to silence speculators by banning CDS. What Goldman-Sachs was
doing was mis-selling<a class="western" href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#fn6x0"><span style="color: blue;"><sup><u>6</u></sup></span></a>
MBS to customers because, as an institution, it did not believe the
products had the value they were marketing them at: it was being
in-sincere.
</div>
<h3 align="left" class="western" style="orphans: 2; widows: 2;">
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<a class="western" href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#fn1x0-bk"><span style="color: blue;"><sup><span style="font-size: x-small;"><i><u>1</u></i></span></sup></span><span style="color: blue;"><span style="font-family: "times new roman" , serif;"><span style="font-size: x-small;"><span lang="en-GB"><i><u>
</u></i></span></span></span></span></a><span style="font-size: x-small;"><span style="font-family: "times new roman" , serif;"><span style="font-size: x-small;"><span lang="en-GB"><i>The
New York Stock Exchange employs the ‘specialist’ system that
combines the role of broker and dealer.</i></span></span></span></span><span style="font-size: x-small;"><i>
</i></span><span style="font-size: x-small;"><span style="font-family: "times new roman" , serif;"><span style="font-size: x-small;"><span lang="en-GB"><i>From
our perspective this is a degradation of the market-maker’s
particular role for the benefit of the monopolistic</i></span></span></span></span><span style="font-size: x-small;"><i>
</i></span><span style="font-size: x-small;"><span style="font-family: "times new roman" , serif;"><span style="font-size: x-small;"><span lang="en-GB"><i>specialists.</i></span></span></span></span><span style="font-size: x-small;"><i>
</i></span>
</div>
<div align="left" class="western" style="line-height: 100%; margin-bottom: 0cm; orphans: 2; widows: 2;">
<a class="western" href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#fn2x0-bk"><span style="color: blue;"><sup><span style="font-size: x-small;"><i><u>2</u></i></span></sup></span><span style="color: blue;"><span style="font-family: "times new roman" , serif;"><span style="font-size: x-small;"><span lang="en-GB"><i><u>
</u></i></span></span></span></span></a><span style="font-size: x-small;"><span style="font-family: "times new roman" , serif;"><span style="font-size: x-small;"><span lang="en-GB"><i>W.
Bagehot was a pseudonym for Jack Treynor.</i></span></span></span></span><span style="font-size: x-small;"><i>
</i></span>
</div>
<div align="left" class="western" style="line-height: 100%; margin-bottom: 0cm; orphans: 2; widows: 2;">
<a class="western" href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#fn3x0-bk"><span style="color: blue;"><sup><span style="font-size: x-small;"><i><u>3</u></i></span></sup></span><span style="color: blue;"><span style="font-family: "times new roman" , serif;"><span style="font-size: x-small;"><span lang="en-GB"><i><u>
</u></i></span></span></span></span></a><span style="font-size: x-small;"><span style="font-family: "times new roman" , serif;"><span style="font-size: x-small;"><span lang="en-GB"><i>Arbitrageurs
aim to ensure prices of many assets in the market are consistent, a
practice described by</i></span></span></span></span><span style="font-size: x-small;"><i>
</i></span><span style="font-size: x-small;"><span style="font-family: "times new roman" , serif;"><span style="font-size: x-small;"><span lang="en-GB"><i>Fibonacci
eight hundred years ago (</i></span></span></span></span><span style="font-size: x-small;"><a class="western" href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XLA"><span style="color: blue;"><span style="font-family: "times new roman" , serif;"><span style="font-size: x-small;"><span lang="en-GB"><i><u>Fibonacci
and Sigler</u></i></span></span></span></span></a></span><span style="font-size: x-small;"><span style="font-family: "times new roman" , serif;"><span style="font-size: x-small;"><span lang="en-GB"><i>, </i></span></span></span></span><span style="font-size: x-small;"><a class="western" href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XLA"><span style="color: blue;"><span style="font-family: "times new roman" , serif;"><span style="font-size: x-small;"><span lang="en-GB"><i><u>2003</u></i></span></span></span></span></a></span><span style="font-size: x-small;"><span style="font-family: "times new roman" , serif;"><span style="font-size: x-small;"><span lang="en-GB"><i>:180).</i></span></span></span></span><span style="font-size: x-small;"><i>
</i></span>
</div>
<div align="left" class="western" style="line-height: 100%; margin-bottom: 0cm; orphans: 2; widows: 2;">
<a class="western" href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#fn4x0-bk"><span style="color: blue;"><sup><span style="font-size: x-small;"><i><u>4</u></i></span></sup></span><span style="color: blue;"><span style="font-family: "times new roman" , serif;"><span style="font-size: x-small;"><span lang="en-GB"><i><u>
</u></i></span></span></span></span></a><span style="font-size: x-small;"><span style="font-family: "times new roman" , serif;"><span style="font-size: x-small;"><span lang="en-GB"><i>While
‘confusion’ has long meant disordered, in metallurgy, a branch of
finance in the seventeenth century, it</i></span></span></span></span><span style="font-size: x-small;"><i>
</i></span><span style="font-size: x-small;"><span style="font-family: "times new roman" , serif;"><span style="font-size: x-small;"><span lang="en-GB"><i>was
used to refer to the point at which metals, such as gold and silver,
mix as molten liquids - ‘com-fundere’ = ‘with</i></span></span></span></span><span style="font-size: x-small;"><i>
</i></span><span style="font-size: x-small;"><span style="font-family: "times new roman" , serif;"><span style="font-size: x-small;"><span lang="en-GB"><i>pouring’.
</i></span></span></span></span><span style="font-size: x-small;"><i><span style="font-family: "times new roman" , serif;"><span style="font-size: x-small;"><span lang="en-GB">Confusion
de Confusiones </span></span></span></i></span><span style="font-size: x-small;"><span style="font-family: "times new roman" , serif;"><span style="font-size: x-small;"><span lang="en-GB"><i>may
be a pun implying a disordered mixing.</i></span></span></span></span><span style="font-size: x-small;"><i>
</i></span>
</div>
<div align="left" class="western" style="line-height: 100%; margin-bottom: 0cm; orphans: 2; widows: 2;">
<a class="western" href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#fn5x0-bk"><span style="color: blue;"><sup><span style="font-size: x-small;"><i><u>5</u></i></span></sup></span><span style="color: blue;"><span style="font-family: "times new roman" , serif;"><span style="font-size: x-small;"><span lang="en-GB"><i><u>
</u></i></span></span></span></span></a><span style="font-size: x-small;"><span style="font-family: "times new roman" , serif;"><span style="font-size: x-small;"><span lang="en-GB"><i>In
A, the hedge-funds had an insurable interest; B, ratings agencies had
a bigger influence on pricing</i></span></span></span></span><span style="font-size: x-small;"><i>
</i></span><span style="font-size: x-small;"><span style="font-family: "times new roman" , serif;"><span style="font-size: x-small;"><span lang="en-GB"><i>mortgage
default than CDS; C, banks win and lose with CDS - that’s the point
of market-making; D, disassociating</i></span></span></span></span><span style="font-size: x-small;"><i>
</i></span><span style="font-size: x-small;"><span style="font-family: "times new roman" , serif;"><span style="font-size: x-small;"><span lang="en-GB"><i>payout
from loss does create moral hazard if there is an insured interest,
standardising payout enables price</i></span></span></span></span><span style="font-size: x-small;"><i>
</i></span><span style="font-size: x-small;"><span style="font-family: "times new roman" , serif;"><span style="font-size: x-small;"><span lang="en-GB"><i>discovery.</i></span></span></span></span><span style="font-size: x-small;"><i>
</i></span>
</div>
<div align="left" style="line-height: 100%; margin-bottom: 0.49cm; margin-top: 0.49cm; orphans: 2; widows: 2;">
</div>
<div align="left" class="western" style="line-height: 100%; margin-bottom: 0cm; orphans: 2; widows: 2;">
<a class="western" href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#fn6x0-bk"><span style="color: blue;"><sup><span style="font-size: 10pt;"><i><u>6</u></i></span></sup></span><span style="color: blue;"><span style="font-family: "times new roman" , serif;"><span style="font-size: 10pt;"><span lang="en-GB"><i><u>
</u></i></span></span></span></span></a><span style="font-size: 10pt;"><span style="font-family: "times new roman" , serif;"><span style="font-size: 10pt;"><span lang="en-GB"><i>In
January 2016 Goldman-Sachs reached a </i></span></span></span></span><span style="font-size: 10pt;"><span style="font-family: "times new roman" , serif;"><span style="font-size: 10pt;"><span lang="en-GB"><i>$</i></span></span></span></span><span style="font-size: 10pt;"><span style="font-family: "times new roman" , serif;"><span style="font-size: 10pt;"><span lang="en-GB"><i>5.1bn
settlement with the US government and other agencies for</i></span></span></span></span><span style="font-size: 10pt;"><i>
</i></span><span style="font-size: 10pt;"><span style="font-family: "times new roman" , serif;"><span style="font-size: 10pt;"><span lang="en-GB"><i>mis-selling
mortgage-backed securities in the run-up to the financial crisis</i></span></span></span></span><span style="font-size: 10pt;"><i>
</i></span>
</div>
Tim Johnsonhttp://www.blogger.com/profile/06952723922503939504noreply@blogger.com0tag:blogger.com,1999:blog-3046071861494986299.post-21607199870195325752015-12-21T03:08:00.000-08:002015-12-21T03:14:23.151-08:00Why did Shakespeare portray the Merchant of Venice as Christ-like?<div align="justify" style="line-height: 100%; margin-bottom: 0.49cm; margin-top: 0.49cm;">
I have been interested for a few years in the idea that Antonio, the eponymous Merchant of Venice, is the personification of <i>agape</i>, Christian love, in Shakespeare's play. While the argument I offer here in the week before Christmas has its basis in Christian doctrine as an atheist and a pragmatist I think the case is equally valid for secular pragmatists in emphasising the need to temper facts with values in order to escape the 'iron cage of rationality'.</div>
<div align="justify" style="line-height: 100%; margin-bottom: 0.49cm; margin-top: 0.49cm;">
Shakespeare’s <i>The Merchant of Venice </i>is thought to have been
written between 1596 and 1598 and was performed by the King’s Men
at James’ I & VI court in February 1605 (Wilson, 1994:707).
Context relevant to this argument is that Gresham College had been
established in in 1598. Thomas Gresham had been born in London around
1519 into a prominent merchant family and was first appointed the
‘Royal Factor’ at Antwerp in 1551 but was replaced during Mary’s
reign (1553‒1558). He returned to public service between 1560 and
1572 working to secure Elizabeth’s crown, notably by manipulating
the Antwerp Bills market to ensure that Elizabeth could borrow
cheaply (Burgon, 2004:9‒12), (Johnson, 1940:594‒600).
When he died in 1579 he bequeathed most of his wealth to charity,
through the Mercer’s Company, and to the foundation of Gresham
College on his wife’s death.
</div>
<div align="justify" style="line-height: 100%; margin-bottom: 0.49cm; margin-top: 0.49cm;">
The opening of Gresham College was the culmination of a long effort
in Elizabethan England to bring about the establishment of a
permanent, endowed foundation which would offer instruction and
further research in the mathematical sciences and provide a
convenient rallying point for all who were concerned with promoting
progress in the practical application of these sciences to useful
works.<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#fn1x0"><span style="color: blue; font-size: xx-small;"><sup><u>1</u></sup></span></a>
(Johnson, 1940::424)</div>
<div align="justify" style="line-height: 100%; margin-bottom: 0.49cm; margin-top: 0.49cm;">
Gresham was England’s most influential merchant of his age and a
prominent public figure.
</div>
<div align="justify" style="line-height: 100%; margin-bottom: 0.49cm; margin-top: 0.49cm; text-indent: 0.64cm;">
English merchants had sailed to the Arabian Sea in 1591 and then
petitioned Elizabeth I to support ventures in the East Indies, with
the East India Company being granted a Royal Charter on the last day
of 1600. Elizabeth died in 1603 and within a year of his accession
James VI & I authorised a new translation of the Bible that would
satisfy the Puritan faction without undermining Anglican authority.
The relevance of these observations are that at the time of creating
<i>The</i> <i>Merchant of Venice </i>the London merchant class was
growing in influence and were associated with the Puritans, well
versed in scripture.
</div>
<div align="justify" style="line-height: 100%; margin-bottom: 0.49cm; margin-top: 0.49cm; text-indent: 0.64cm;">
While a popular play, <i>The Merchant </i>is often regarded as
problematic (Midgley, 1960:119). There are a number of themes
that, to many contemporary readers, seem incoherent and the last Act
of the play, coming after the drama of the trial scene, is sometimes
thought of as redundant. The analysis that we undertake is rooted in
Gollancz (1931) and Coghill (1950) that approach the play
on the basis of a medieval allegory and we interpret it in the
context of Renaissance humanism, synthesising classical philosophy
and Biblical allusion. In taking this path we shall present the play
as coherent and justify it on the basis that “Biblical allusion and
imagery is so precise and pervasive as to be patently deliberate”
(Lewalski, 1962:328).
</div>
<div align="justify" style="line-height: 100%; margin-bottom: 0.49cm; margin-top: 0.49cm; text-indent: 0.64cm;">
Specifically the play can be read as a study of the four types of
love: <i>storge </i>‒ familial love;, <i>philia</i> ‒ friendship;
<i>eros </i>‒ physical love; and <i>agape </i>‒ spiritual love.
Antonio, the eponymous merchant of Venice, personifies agape, the
highest form of love, and is a Christ-like figure
(Lewalski, 1962:327; Sisk, 1969:219; Coolidge, 1976:256; Hamlin, 2013:71). <i>Agape </i>animates
the central story of the flesh‒bond Antonio makes with Shylock:
“Greater love hath no man than this, that a man lay down his life
for his friends.”(John 15:13) and provides context for Bassanio’s
capture of Portia by solving the casket riddle (Lewalski, 1962:335).
On the other hand Shylock personifies the devil and is devoid of all
love. His only friendship, with Tubal, focuses on business, in
contrast to the amicable relationships of all other characters in the
play. Shylock’s daughter, Jessica, absconds with his wealth, and
what does Shylock love most: his daughter or his ducats
(II.viii.15)<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#fn2x0"><span style="color: blue; font-size: xx-small;"><sup><u>2</u></sup></span></a>,
pointing to the absence of <i>storge</i>. Jessica trades Shylock’s
dead wife’s gift of a ring for a monkey, severing his connection to
<i>eros</i>. Portia, resident of the heavenly Belmont, represents
Mercy, or God’s Grace, and Bassanio, inhabiting worldy Venice with
Antonio, represents ‘Everyman’. Her obedience to her dead father
in submitting to the casket test emphasises the absence of <i>storge
</i>in Shylock’s relationship with Jessica. Antonio’s willingness
to sacrifice himself for Bassanio so that the young man can come into
union with Portia parallels Christ’s sacrifice for mankind, central
to Augustinian doctrine underpinning Puritanism and ratified by the
Council of Trent in 1547<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#fn3x0"><span style="color: blue; font-size: xx-small;"><sup><u>3</u></sup></span></a>.
</div>
<div align="justify" style="line-height: 100%; margin-bottom: 0.49cm; margin-top: 0.49cm; text-indent: 0.64cm;">
The ‘problematic’ nature of <i>The Merchant </i>was highlighted
by Auden (2013) where the play is presented, in ‘Brothers and
Others’, as focusing on a homo‒erotic relationship between
Antonio and Bassanio. These interpretations sometimes begin by
focussing on the melancholy hanging over Antonio at the start of the
play and Salerio’s comment that “I think he loves the world only
for him” (II.vii.50).
</div>
<div align="justify" style="line-height: 100%; margin-bottom: 0.49cm; margin-top: 0.49cm; text-indent: 0.64cm;">
Auden recognises the Christian basis of <i>The Merchant
</i>(Kirsch, 2008:94‒96) but misses the significance of
Antonio’s Christ‒like persona and this oversight generates
interpretations such as Ferber (1990) and Berger (2010)
that see the play as unpleasant. The issue is that if Antonio is
Christ‒like then his opposition to Shylock is in Shylock’s
personification of the ‘Old Law’ rather than to his race: “For
the law was given by Moses, but grace and truth came by Jesus
Christ.” (John 1:17). Augustinian doctrine centres on the idea that
everyone is born into a state of ‘Original Sin’, and left to
their own devices they are incapable of being anything other than
selfish; even a ‘good’ non‒Christian acts only in their own
self‒interest. Without Antonio’s <i>agape </i>and Portia’s
Grace all the play’s characters become distasteful to some degree.
In this context Antonio’s melancholy in the opening scene can be
compared to Christ’s loneliness in the wilderness<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#fn4x0"><span style="color: blue;"><sup><u>4</u></sup></span></a>
or immediately before the Passion (Matt 26:38).
</div>
<div align="justify" style="line-height: 100%; margin-bottom: 0.49cm; margin-top: 0.49cm; text-indent: 0.64cm;">
Antonio’s past treatment of Shylock appears ‘un‒Christian’
(I.iii.116‒138) and Shylock seems to be presenting the other cheek.
However, we know from Jessica that from the start her father was
plotting against Antonio (III.ii.296‒300). Also, Shylock’s
reference to Antonio as a “fawning publican” alludes to a parable
(Luke 18:9‒13) where a Pharisee ‒ the pious adherer to the law ‒
is compared to a the publican ‒ who recognises his faults and begs
for God’s mercy (Lewalski, 1962:331). Antonio’s past
behaviour has the dramatic purpose that it inhibits the reader from
seeing Shylock as completely unjustified and theologically it points
to the humanity of Antonio/Christ (Heb 2:17‒18; Phill 2:7).
</div>
<div align="justify" style="line-height: 100%; margin-bottom: 0.49cm; margin-top: 0.49cm; text-indent: 0.64cm;">
<a href="https://www.blogger.com/null" name="_GoBack"></a>
The relevance of these observations to debt markets are in that
exchange pervades <i>The Merchant</i>. Sharp (1986:261) lists
eleven major exchanges in the play, and in the context of the ten
types of transactions that Seaford (2004:23‒26) gives, we can
add another exchange: the prize of Portia, and her inheritance, that
her father bestows on Bassanio for solving the casket puzzle (Seaford
type (2)). There is the exchange of things for the sake of things
(Seaford (10)); Jessica’s exchange of her mothers ring for a
monkey. A bride-price (Seaford (8)) that Bassanio receives by
marrying Portia and the money Jessica steals from her father and
gives to Lorenzo (Seaford (1)). Shylock is forced to give property to
Jessica and Lorenzo on his conversion, this falls into
re‒distribution to create solidarity within groups (Seaford (4))
while the Duke’s confiscation of his property is a ransom (Seaford
(7)).
</div>
<div align="justify" style="line-height: 100%; margin-bottom: 0.49cm; margin-top: 0.49cm; text-indent: 0.64cm;">
There are three rings given as gifts between individuals (Seaford
(3)), including the ring Shylock’s wife gave him and a ring that
Portia’s lady‒in‒waiting gives to Gratiano in conjunction of
the most significant ring, the one Portia gives to Bassanio as
symbolic of all her wealth (III.ii.175) (Newman, 1987). Bassanio
swears not to part with the ring, on his life (III.ii.187‒189), but
gives it to Portia/Balthasar (IV.ii.11) by way of payment for saving
Antonio. In the final scene, Portia realises Bassanio has passed the
ring onto the ‘lawyer’ and vows never to share her bed with
Bassanio until he recovers the ring (V.i.198‒249). Portia was the
lawyer and is able to give the ring to Antonio (V.i.273) who pledges
surety for Bassanio’s good behaviour in the future, and the ring is
returned to Bassanio. Sharp (1986, :254‒257) gives a clear
account of how there is no malice, directed at the possibility of an
erotic relationship between Bassanio and Antonio, in the trick Portia
plays on Bassanio. Rather the ring, as a gift, binds Portia, Bassanio
and Antonio together, alluding to how Grace, Everyman and Christ are
bound in Christian doctrine.
</div>
<div align="justify" style="line-height: 100%; margin-bottom: 0.49cm; margin-top: 0.49cm; text-indent: 0.64cm;">
The key financial exchange is initiated by the loan Antonio secures
from Shylock. Antonio is open in his willingness to pay usury for the
loan, in recognition of the fact that there is no friendship between
the merchant and the Jew
</div>
<div style="line-height: 100%; margin-bottom: 0.49cm; margin-top: 0.49cm;">
If thou wilt lend this money, lend it not <br />
As to thy friends;
for when did friendship take <br />
A breed for barren metal of his
friend? (I.iii.142‒144)</div>
<div align="justify" style="line-height: 100%; margin-bottom: 0.49cm; margin-top: 0.49cm;">
This alludes to “Unto a stranger thou mayest lend upon usury; but
unto thy brother thou shalt not lend upon usury: that the Lord thy
God may bless thee in all that thou settest thine hand to in the land
whither thou goest to possess it.” (Deut 23:20). Out of ‘kindness’
Shylock declines the offer to pay usury but imposes a more legitimate
<i>poena</i>, a penalty for default, on the loan: the flesh bond. In
essence Shylock believes he is purchasing Antonio’s life, as
Jessica will later explain (III.ii.296‒300). This contract is ended
in the trail presented in Act 3, and this is where secular
interpretations of the play believe the story should end. However the
essential exchange is between Antonio and Portia. Antonio lends
Bassanio the money so that he can marry Portia and hence Portia
becomes indebted to Antonio. Portia repays this debt the final action
featuring Antonio when she gives news to Antonio that his ships are
not lost (V.i.294‒298). As Sharp (1986:263) explains, the
letter carrying the news is presented to Antonio sealed, yet Portia
knows of its contents. The interpretation is that she wrote the
letter and has repaid the debt ‒ money for money ‒ and highlight
the essential connection between Portia/Grace, Antonio/Christ with
Bassanio/Everyman. Herein lies the key justification for the
religious interpretation: it accounts for the whole play.
</div>
<div align="justify" style="line-height: 100%; margin-bottom: 0.49cm; margin-top: 0.49cm; text-indent: 0.64cm;">
The relevance of this interpretation of <i>The Merchant </i>to the
argument in this paper is in the message that the play delivers
concerning the relationship of Justice and Mercy. Shylock stands for
the law (IV.i.104; IV.i.144) while Portia represents mercy (Gollancz (1931); Coghill (1950); <span style="line-height: 100%; text-indent: 0.64cm;">Lewalski (1962); Bradbrook (1969) )
echoing the medieval allegory ‘The Parliament of Heaven’ where
humans are judged by a prosecution made up of Truth and Justice and a
defence provided by Mercy and Peace. Coolidge (1976) argues that
in </span><i style="line-height: 100%; text-indent: 0.64cm;">The</i><span style="line-height: 100%; text-indent: 0.64cm;"> </span><i style="line-height: 100%; text-indent: 0.64cm;">Merchant </i><span style="line-height: 100%; text-indent: 0.64cm;">Shakespeare presents the essence of
Christianity, in contrast to Judaism, as in judging not simply on the
basis of ‘the Law’ but also on the basis of mercy: “the manner
in which the complex relation between Gospel and Law can function as
a paradigm for relating Christianity to all the values of humanity”
(Coolidge, 1976:256). He begins his case with a discussion of
usury, explaining how “If justice is the principle according to
which the people of God are to deal with one another, usury is
forbidden among them” (Coolidge, 1976:246). The Law, on its
own, will alienate members of a community where as mercy brings them
together. Coolidge refers to William Tyndale who ‘explains in the
introduction to his translation of the New Testament, the Law,
“through teaching every man his duty, doth utter our corrupt
nature.”’ and “only love and mercifulness understandeth the
Law, and else nothing.” Shakespeare takes a consistent line in
</span><i style="line-height: 100%; text-indent: 0.64cm;">Measure for Measure</i><span style="line-height: 100%; text-indent: 0.64cm;"> (Dickinson, 1962; Wilson, 1994).</span></div>
<div align="justify" style="line-height: 100%; margin-bottom: 0.49cm; margin-top: 0.49cm; text-indent: 0.64cm;">
The question presents itself: why did Shakespeare personify Christ
and <i>agape </i>in the form of the eponymous merchant? It could be
that merchants were perceived as being particularly virtuous, the
<i>doux‒commerce </i>thesis. It could also be because Shakespeare
recognised that merchants were exposed to a particular peril of
focusing on the cardinal virtues of justice and prudence at the
expense of charity; what McCloskey (1998) describes as P virtues
at the expense of S virtues. In presenting the merchant as
personifying the highest Christian virtue he would be engaging with
the Puritan sympathies of the emerging merchant class
(Brenner, 2003:240‒315) and reminding them that they had moral
responsibilities.
</div>
<div align="justify" style="line-height: 100%; margin-bottom: 0.49cm; margin-top: 0.49cm; text-indent: 0.64cm;">
The significance of mercy in commerce is not a redundant message
(Rainbolt, 1990). <i>The</i> <i>Merchant of Venice </i>eloquently
stands against the dominance in finance of both consequentialist
ethics ‒ that transforms economics into a ‘cyborg science’
(Mirowski, 1998; Davis, 2008:357) ‒ and deontological
ethics ‒ that is over-bureaucratic and rigid (van
Staveren, 2007:23‒26) while susceptible to ‘gaming’
(Watts, 2012).
</div>
<h3 class="western">
References</h3>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Auden, W. (2013). <i>The Dyer’s Hand</i>. Faber & Faber.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Berger, H. (2010). Mercifixion in “The Merchant of Venice”: The
riches of embarrassment. <i>Renaissance Drama</i>, 38:3‒45.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Bradbrook, M. C. (1969). Moral theme and romantic story. In
Wilders, J., editor, <i>Shakespeare: The Merchant of Venice: A
Casebook</i>. Macmillan.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Brenner, R. (2003). <i>Merchants and Revolution: Commercial Change,
Political Conflict,</i> <i>and London’s Overseas Traders,
1550‒1653</i>. Verso.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Burgon, J. W. (2004). <i>The Life and Times of Sir Thomas
Gresham: Volume 2</i>. Adamant Media Corporation.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Coghill, N. (1950). The basis of Shakespearean Comedy: A study in
Medieval affinities. <i>Essays and Studies</i>, 3:1‒28.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Coolidge, J. S. (1976). Law and love in The Merchant of Venice.
<i>Shakespeare Quarterly</i>, 27(3):243‒263.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Davis, J. (2008). The turn in recent economics and return to
orthodoxy. <i>Cambridge Journal</i> <i>of Economics</i>, 32:349‒366.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Dickinson, J. W. (1962). Renaissance equity and “Measure for
Measure”. <i>Shakespeare</i> <i>Quarterly</i>, 13(3):287‒297.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Ferber, M. (1990). The ideology of The Merchant of Venice. <i>English
Literary Renaissance</i>, 20(3):431‒464.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Gollancz, I. (1931). <i>Allegory and Mysticism in Shakespeare. A
Medievalist on “The</i> <i>Merchant of Venice”</i>. Folcroft
Library Editions.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Hamlin, H. (2013). <i>The Bible in Shakespeare</i>. OUP Oxford.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Johnson, F. R. (1940). Gresham College: Precursor of the Royal
Society. <i>Journal of the</i> <i>History of Ideas</i>, 1(4):413‒438.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Kirsch, A. (2008). <i>Auden and Christianity</i>. Yale University
Press.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Lewalski, B. K. (1962). Biblical allusion and allegory in “The
Merchant of Venice”. <i>Shakespeare Quarterly</i>, 13(3):327‒343.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
McCloskey, D. N. (1998). Bourgeois virtue and the history of P
and S. <i>The Journal of</i> <i>Economic History</i>, 58(2):297‒317.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Midgley, G. (1960). The Merchant of Venice: A reconsideration. <i>Essays
in Criticism</i>, 10(2):119‒133.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Mirowski, P. (1998). Machine dreams: Economic agents as cyborgs.
<i>History of Political</i> <i>Economy</i>, 29(1):13‒40.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Newman, K. (1987). Portia’s ring: Unruly women and structures of
exchange in The Merchant of Venice. <i>Shakespeare Quarterly</i>,
38(1):19‒33.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Rainbolt, G. W. (1990). Mercy: An independent, imperfect virtue.
<i>American Philosophical</i> <i>Quarterly</i>, 27(2):169‒173.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Seaford, R. (2004). <i>Money and the Early Greek Mind: Homer,
Philosophy, Tragedy</i>. Cambridge University Press.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Shakespeare, W., Mowatt, B. A., and Werstine, P. (2015). <i>The
Merchant of Venice</i>. Folger Digital Texts. Simon and Schuster.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Sharp, R. A. (1986). Gift exchange and the economies of spirit
in “The Merchant of Venice”. <i>Modern Philology</i>,
83(3):250‒265.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Sisk, J. P. (1969). Bondage and release in The Merchant of
Venice. <i>Shakespeare Quarterly</i>, 20(2):217‒223.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Van Staveren, I. (2007). Beyond utilitarianism and deontology: Ethics
in economics. <i>Review</i> <i>of Political Economy</i>, 19(1):21‒35.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Watts, M. (5 October 2012). JP Morgan and the CRM: How Basel 2.5
beached the London Whale. <i>Risk Magazine</i>.
<span style="font-family: Courier New, serif;">http://www.risk.net/digital_assets/5926/jpm.pdf</span>.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Wilson, M. J. (1994). View of justice in shakespeare’s The
Merchant of Venice and Measure for Measure. <i>Notre Dame Law Review</i>,
70(3):695‒726.
</div>
<div class="western" style="line-height: 100%; margin-bottom: 0cm;">
<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#fn1x0-bk"><span style="color: blue;"><sup><span style="font-size: x-small;"><i><u>1</u></i></span></sup></span><span style="color: blue;"><span style="font-size: x-small;"><i><u>
</u></i></span></span></a><span style="font-size: x-small;"><i>Gresham’s
(illegitimate, but only surviving child) daughter married the brother
of Sir Francis Bacon.</i></span><span style="font-size: x-small;"><i>
</i></span>
</div>
<div class="western" style="line-height: 100%; margin-bottom: 0cm;">
<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#fn2x0-bk"><span style="color: blue;"><sup><span style="font-size: x-small;"><i><u>2</u></i></span></sup></span><span style="color: blue;"><span style="font-size: x-small;"><i><u>
</u></i></span></span></a><span style="font-size: x-small;"><i>Line
references in the play are taken from Shakespeare et al. (2015),
accessed on‒line in December</i></span><span style="font-size: x-small;"><i>
</i></span><span style="font-size: x-small;"><i>2015.</i></span></div>
<div class="western" style="line-height: 100%; margin-bottom: 0cm;">
<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#fn3x0-bk"><span style="color: blue;"><sup><span style="font-size: x-small;"><i><u>3</u></i></span></sup></span><span style="color: blue;"><span style="font-size: x-small;"><i><u>
</u></i></span></span></a><span style="font-size: x-small;"><i>See
The Council of Trent’s Decree on Justification, chapter III.</i></span><span style="font-size: x-small;"><i>
</i></span>
</div>
<br />
<div class="western" style="line-height: 100%; margin-bottom: 0cm;">
<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#fn4x0-bk"><span style="color: blue;"><sup><span style="font-size: 10pt;"><i><u>4</u></i></span></sup></span><span style="color: blue;"><span style="font-size: x-small;"><i><u>
</u></i></span></span></a><span style="font-size: x-small;"><i>See,
for example, the Catechism of the Catholic Church, paragraph 538.</i></span><span style="font-size: 10pt;"><i>
</i></span>
</div>
Tim Johnsonhttp://www.blogger.com/profile/06952723922503939504noreply@blogger.com0tag:blogger.com,1999:blog-3046071861494986299.post-37401678197225390362015-12-16T05:24:00.002-08:002015-12-16T05:24:54.480-08:00The problem of voluntary slavery for utilitarianism<div style="line-height: 100%; margin-bottom: 0.09cm; margin-top: 0.09cm;">
<a href="http://magic-maths-money.blogspot.co.uk/2013/10/reciprocity-as-foundation-of-financial.html" target="_blank">Reciprocity is a norm</a>, a rule embedded in financial mathematics,
which permits high rates of interest to poorer, higher risk,
borrowers. This means that phenomena such as debt-bondage can become
prevalent (von Lilienfeld-Toal and Mookherjee, 2010). Voluntary
slavery is a limiting expression of debt-bondage (Genicot, 2002)
and by considering the case of voluntary slavery we can highlight
limitations of, not just, basing lending decisions solely on the norm
of reciprocity, but also, of weaknesses of the utilitarian argument
upon which much neo-classical economic theory is founded.
</div>
<div style="line-height: 100%; margin-bottom: 0.09cm; margin-top: 0.09cm;">
<br /></div>
<div style="line-height: 100%; margin-bottom: 0.09cm; margin-top: 0.09cm; text-indent: 0.64cm;">
Contemporary deontological ethics, rooted in Kant, argues that one
should “Act in such a way that you always treat human beings as
persons rather than as things” (Ellerman, 1988:1110) and on
this basis slavery can never be justified and hence voluntary slavery
cannot be permitted. There is a problem for consequentialist ethics
originating in Mill’s foundational statement in <i>On</i> <i>Liberty</i>
</div>
<blockquote class="tr_bq" style="line-height: 100%; margin-bottom: 0.09cm; margin-top: 0.09cm;">
the only purpose for which power can be rightfully exercised over any
member of a civilized community, against his will, is to prevent harm
to others. His own good, either physical or moral, is not a
sufficient warrant. (Mill, 2015:I.9)</blockquote>
<div style="line-height: 100%; margin-bottom: 0.09cm; margin-top: 0.09cm;">
Some modern libertarians believe a free individual is free to sell
themselves into slavery (Nozick, 1974:331). Mill, himself, did
not, arguing in <i>On Liberty </i>that
</div>
<blockquote class="tr_bq" style="line-height: 100%; margin-bottom: 0.09cm; margin-top: 0.09cm;">
by selling himself for a slave, he abdicates his liberty; he foregoes
any future use of it beyond that single act. He therefore defeats, in
his own case, the very purpose which is the justification of allowing
him to dispose of himself.(Mill, 2015:V.11)</blockquote>
<div style="line-height: 100%; margin-bottom: 0.09cm; margin-top: 0.09cm;">
This presents a Russell-like paradox; you are free to do anything
apart from forgo your freedom. This is the approach taken by Austrian
economists who have a deontological injunction on alienating an
individual from their will.
</div>
<div style="line-height: 100%; margin-bottom: 0.09cm; margin-top: 0.09cm;">
<br /></div>
<div style="line-height: 100%; margin-bottom: 0.09cm; margin-top: 0.09cm; text-indent: 0.64cm;">
Fuchs (2001) recognises the inadequacy of this argument within a
utilitarian framework. He notes that for Mill a person is only
competent to judge what is in their best interest if (1) they have
had knowledge of the alternatives in question; (2) the ability to
enjoy the options; and (3) they must be able to foresee the probable
consequences of their actions (Fuchs, 2001:236). On this basis,
along with other consequentionalists (see Schwan (2013:759‒761)
for a summary), Fuchs sees the central issue as the permanence of
voluntary slavery. This argument points to one of the fundamental
weaknesses with consequentialist ethics: the individual’s inability
to foresee that far into the future and explains the absolute
rejection of voluntary slavery by Austrian economics.
</div>
<div style="line-height: 100%; margin-bottom: 0.09cm; margin-top: 0.09cm; text-indent: 0.64cm;">
<br /></div>
<div style="line-height: 100%; margin-bottom: 0.09cm; margin-top: 0.09cm; text-indent: 0.64cm;">
Schwan (2013) argues that the ‘permanence’ issue could not
have explained Mill’s objection to voluntary slavery because Mill
was also opposed to ‘coolie’ ‒ bonded ‒ labour, which is not
permanent. Schwan (2013:764‒765) resorts to Mill’s paradox
when he argues that “we know <i>a</i> <i>priori </i>that entering
such a contract severs the connection between the individual’s
actions and their conception of the good.”; ultimately society
knows best.
</div>
<div style="line-height: 100%; margin-bottom: 0.09cm; margin-top: 0.09cm; text-indent: 0.64cm;">
<br /></div>
<div style="line-height: 100%; margin-bottom: 0.09cm; margin-top: 0.09cm; text-indent: 0.64cm;">
Fuchs (2001:244‒247) offers a more interesting argument when
he distinguishes two types of autonomy underpinning liberty:
‘autonomy<span style="font-size: xx-small;"><sub>1</sub></span>’
and ‘autonomy<span style="font-size: xx-small;"><sub>2</sub></span>’.
‘Autonomy<span style="font-size: xx-small;"><sub>1</sub></span>’
is associated with “authentic representations of and are coherent
with the agent’s own settled ideals” and Fuchs identifies seven
factors “inimical to autonomy<span style="font-size: xx-small;"><sub>1</sub></span>”
including reversibility and a lack of ignorance, indoctrination,
coercion, compulsion and duress. ‘Autonomy<span style="font-size: xx-small;"><sub>2</sub></span>’
is “more limited” and relates to specific actions: “ one can do
what one wants to do and can refrain from doing what one does not
want to do.” Autonomy<span style="font-size: xx-small;"><sub>1</sub></span>
would permit ‘Mormon marriage’ or entry into a convent where an
individuals rights and freedoms are curtailed.
</div>
<div style="line-height: 100%; margin-bottom: 0.09cm; margin-top: 0.09cm; text-indent: 0.64cm;">
<br /></div>
<div style="line-height: 100%; margin-bottom: 0.09cm; margin-top: 0.09cm; text-indent: 0.64cm;">
There are two comments on Fuchs’ argument. Firstly, it seems as
much Kantian as consequentialist (White, 2011:11‒13).
Secondly, Fuchs highlights the elitist nature of Mill’s philosophy.
The autonomous agent must be educated (1), be able to appreciate (2)
‒ a very normative concept, Fuchs (2001:236) compares
appreciating a nursery rhyme to Beethoven, coca-cola to Château
Margaux ‒ their choices and an ability to foresee (3).
Archard (1990:464) points out that Mill approves of paternalism
so long as it enhances the individual’s rationality ‒ education
is compulsory ‒ and so their ability to be free. Arguing that
rationality is based on education implies it is cultural and one
could conclude that Fuchs’ ‘autonomy<span style="font-size: xx-small;"><sub>1</sub></span>’
would prohibit an Aztec willingly going to sacrifice because despite
the act being “coherent with the agent’s own settled ideals” we
could argue that the Aztec has been ‘indoctrinated’.
</div>
<div style="line-height: 100%; margin-bottom: 0.09cm; margin-top: 0.09cm; text-indent: 0.64cm;">
<br /></div>
<div style="line-height: 100%; margin-bottom: 0.09cm; margin-top: 0.09cm; text-indent: 0.64cm;">
<a href="https://www.blogger.com/null" name="_GoBack"></a>
The relevance of the second comment is that for the utilitarian
argument to hold the agent must be securely embedded in society.
Hirschman (1997) identifies that Smith’s ‘hidden hand’,
and hence the utilitarian argument, must <a href="http://magic-maths-money.blogspot.co.uk/2015/06/does-hidden-hand-need-to-hold-stake-in.html" target="_blank">have a stake in society</a> and
international relations are based on “a group of states, conscious
of certain common interests and common values, form a society in the
sense that they conceive themselves to be bound by a common set of
rules in their relations with one another” (Bull, 1977:13).
The libertarian admits voluntary slavery, and by implication
debt-bondage, on the basis that the individual is atomised and can
alienate themselves from society. On the other hand, we argue that
the consequentialist, acting as a Kantian, rejects voluntary slavery
because the individual is embedded in society. This realisation is
driving the “re-introduction of ethics into economics” (van
Staveren, 2008; White and van Staveren, 2013). The
practical implication of these standpoints is the libertarian can
accommodate inequality ‒ because this facilitates the separation of
communities into those capable of rationally rejecting voluntary
slavery and those incapable ‒ where as the ethical economist
cannot.
</div>
<h3 class="western">
References</h3>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Archard, D. (1990). Freedom not to be free: The
case of the slavery contract in J. S. Mill’s <i>On Liberty</i>. <i>The
Philosophical Quarterly (1950-)</i>, 40(161):453—465.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Bull, H. (1977). <i>The Anarchical Society: A Study
of Order in World Politics</i>. Columbia University Press.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Ellerman, D. P. (1988). The Kantian
Person/Thing principle in political economy. <i>Journal</i> <i>of
Economic Issues</i>, 22(4):1109—1122.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Fuchs, A. E. (2001). Autonomy, slavery, and
mill’s critique of paternalism. <i>Ethical Theory</i> <i>and Moral
Practice</i>, 4(3):231—251.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Genicot, G. (2002). Bonded labor and serfdom: a
paradox of voluntary choice. <i>Journal of</i> <i>Development
Economics</i>, 67(1):101—127.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Hirschman, A. (1997). <i>The Passions and the
Interests: Political Arguments for Capitalism</i> <i>before Its
Triumph</i>. Princeton University Press.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Mill, J. (2015). On liberty. In Philp, M. and
Rosen, F., editors, <i>On Liberty, Utilitarianism</i> <i>and Other
Essays</i>. Oxford University Press.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Nozick, R. (1974). <i>Anarchy, state, and utopia</i>.
Basic Books.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
Schwan, D. (2013). J. S. Mill on coolie labour and
voluntary slavery. <i>British Journal for</i> <i>the History of
Philosophy</i>, 21(4):754—766.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
van Staveren, I. (2008). Introduction to the
special issue on ethics and economics. <i>Review</i> <i>of Political
Economy</i>, 20(2):159—161.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
von Lilienfeld-Toal, U. and Mookherjee, D. (2010).
The political economy of debt bondage. <i>American Economic Journal:
Microeconomics</i>, 2(3):44—84.
</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
White, M. (2011). <i>Kantian Ethics and Economics:
Autonomy, Dignity, and Character</i>. Stanford University Press.</div>
<div style="line-height: 100%; margin-bottom: 0.25cm; margin-left: 0.85cm; margin-top: 0.25cm; text-indent: -0.85cm;">
<span style="line-height: 100%; text-indent: -0.85cm;"> White, M. and van Staveren, I. (2013). </span><i style="line-height: 100%; text-indent: -0.85cm;">Ethics
and Economics: New Perspectives</i><span style="line-height: 100%; text-indent: -0.85cm;">. Taylor & Francis. </span></div>
Tim Johnsonhttp://www.blogger.com/profile/06952723922503939504noreply@blogger.com0tag:blogger.com,1999:blog-3046071861494986299.post-25250095156697833342015-11-09T08:30:00.000-08:002015-11-09T08:40:33.239-08:00Be Together. Not the Same. Can maths address big data in bankingI recently attended the Alan Turing Institute summit on <a href="https://turing.ac.uk/data-analytics-for-credit-risk/" target="_blank">Data Analytics for Credit Risk</a> and left wondering if statistics is well placed to address the problems of big data and if there were skills in the humanities that were more appropriate. It also lead me to wonder if the neo-classical synthesis' criticism of institutional economics for not being able to deliver predictive theories is reasonable. I end up arguing that bankers should build their businesses on the human and social sciences, not an algorithm driven mathematical science.<br />
<br />
While some of the presentations have been released the ones really relevant to forming my opinion are not (yet?) available, and so I will not attribute un-released sources and will present my own inferences of what was said.<br />
<br />
<a href="http://www.business-school.ed.ac.uk/waf/mdb_event_v2/get_file.php?event_file_id=468" target="_blank">Dan Kellet</a> mentioned that geographers sometimes made better (big data) modellers than statisticians, this was at first interesting. Then another speaker highlighted how a talk at Tate Modern in Liverpool helped him understand a central problem of big data. He recounted how a photograph of a beach, or a desert, suggests that, from a distance, the sand is uniformly coloured, but close up you see that every grain has a different colour, from white to black. Another presenter had given two sequences of similar bank transactions, showing an increase in grocery spending, switching from economy to premium vendors, and a simultaneous increase in cash withdrawals at the weekend. However, while the changes looked similar at the start then ended at opposite ends of the spectrum, one customer proved to be a good credit risk the other a bad one. The explanation is that one set of transactions was indicative of the starting of a long term relationship and the other of the ending of a long term relationship.<br />
<br />
The problem faced by bankers presented with data is not so much one of identifying outliers, as is the case with classical statistics. The decision whether or not to lend to a heroin addict, an outlier, or a Quaker heiress, a different outlier, is easy. what is needed is to pick out the white and black grains of sand from a distance. However, the whole purpose of classical statistics is to blend the different coloured grains of sand into a single hue, represented by a 'statistic'; the opposite of what is needed.<br />
<br />
Of course, most statisticians don't believe the classical statistics of means, variances and p-values, is going to answer the bankers problem. The solution lies in statistical inference.<br />
<br />
A classical statistician, employing frequentist probability, would observe the tossing of a coin and advise on the chances of it coming up a heads, or observe mortality statistics and advise on an insurance premium, or advise on the ability of an opinion poll to predict an election. Statistical inference, based on subjective probability, could asses the probability that <i>I</i> voted a particular way in an election, or that I died because <i>I</i> smoked. The most topical use of Bayesian inference is in Amazon's and Google's predictive modelling to make recommendations. <br />
<br />
However, I have never bought a book on the basis that Amazon recommended it to me. I am not convinced that much can be inferred on the basis that in a order I purchased Brandom's <i><a href="http://www.amazon.co.uk/Making-Explicit-Representing-Discursive-Commitment/dp/0674543300" target="_blank">Making it Explicit</a></i> and Scarey's <i><a href="http://www.amazon.co.uk/Cars-Trucks-Things-that-Go/dp/0007357389" target="_blank">Cars Trucks and Things that Go </a>. </i>The algorithm needs 'colour' added to the data, and this is Google and Facebook's advantage in holding information on my interactions (that I am an academic with young children) and interests.<br />
<br />
The challenge facing banks is summed up in Google's Android catchphrase "Be together. Not the same" highlighting the heterogeneity of people connected together in a community. While there are statistical methods that are able to cluster people, the input to these algorithms is a small collection of parameters and the clusters coarse; I am to be convinced that it is worthwhile for Amazon to actually figure out what to recommend to <i>me</i> based on <i>my</i> transaction history and the banks are already struggling with how to improve their decision making based on 'colourless' data.<br />
<br />
The repeated references at the summit, however tangential, to the human and social sciences got me thinking. Statistical techniques, developed to reduce the distributed mass to a point and then identify ‘outliers’, is irrelevant to the challenge of interpreting huge quantities of data. The modern challenge is, given a mass of information, that looks homogeneous from a distance, to identify similar entities dispersed in the mass. Hence, extracting value from ‘big data’ requires the repeated study of special cases from which general principles can be deduced, skills typically associated with the humanities. The distinction is reminiscent of the difference in <a href="https://en.wikipedia.org/wiki/Adolphe_Quetelet" target="_blank">Quetelet</a>’s and <a href="https://en.wikipedia.org/wiki/Pierre_Guillaume_Fr%C3%A9d%C3%A9ric_le_Play" target="_blank">Le Play</a>’s approaches to social science in the nineteenth century.<br />
<br />
An explosion of data collection in the after 1820 enabled a number of people to observe that certain 'social' statistics, such as murder, suicide and marriage rates were remarkably stable. Quetelet explained this in terms of Gaussian errors. <i>L'homme moyen</i>, 'the average man', was driven by 'social forces', such as egoism, social conventions, and so on, which resulted <i>penchants</i>, for marriage, murder and suicide, which were reflected as the means of social statistics. Deviations from the means were as a consequence of the social equivalent of accidental or inconstant physical phenomena, such as friction or atmospheric variation. <br />
<br />
These theories were popular with the public. France, like the rest of Europe, had been in political turmoil between the fall of Napoleon Bonaparte in 1813 and the creation of the Second Empire in 1852, following the 1848 Revolution. During the 1820s there was an explosion in the number of newspapers published in Paris, and these papers fed the middle classes a diet of social statistics that acted as a barometer to predict unrest. The <i>penchant</i> for murder implied that murder was a consequence of society, the forces that created the <i>penchant</i> were responsible and so the individual murderer could be seen as an 'innocent' victim of the ills of society.<br />
<br />
Despite the public popularity of 'social physics', Quetelet's <i>l'homme moyen</i> was not popular with many academics. The term 'social physics' had, in fact, been coined by the French philosopher, Auguste Comte, who, as part of this overall philosophy of science, believed that first humans would develop an understanding of the 'scientific method' through the physical sciences, which they would then be able to apply to, the harder and more important, 'social sciences'. When Comte realised that Quetelet had adopted his term of `social physics', Comte adopted the more familiar term, <i>sociology</i> for the science of society.<br />
<br />
From a technical standpoint, Quetelet had based this theory on an initial observation that physical traits, such as heights, seemed to be Normally (Gaussian) distributed. The problem was that, apart from the fact that heights are not Normally distributed ( Firstly the Normal distribution is unbounded, and so there is a positive probability of someone having a height of 5 metres or even -3 metres. Secondly, and contradictory, , the incidence of giants and dwarfs in the real population exceeds the expected number based on a Normal distribution of heights. Quetelet was confusing `looks like' with `is'.). Also, since murders and suicides are 'rare', there can be little confidence in the statistics, and many experts of the time, including Comte, rejected Quetelet's theories on the basis that they did not believe that 'laws of society' could be identified simply by examining statistics and observing correlations between data and even Quetelet, later in life counselled against over-reliance in statistics.<br />
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Beyond these practical criticisms there were philosophical objections. The <i>l'homme moyen</i> was a `statistical' composite of all society and who was governed by universal and constant laws. <i>L'homme moyen</i> was nothing like the Enlightenment's <i>l'homme eclaire</i>, the person who applied rational thinking to guide their action, thinking that was guided by science and reason and not statistics. The decline of Quetelet's theorems in Europe coincides not just with the political stability of the Second Empire, but with a change in attitude. The poor were no longer unfortunate as a consequence of their appalling living conditions, but through their individual failings, like drunkenness or laziness. The second half of the nineteenth century was about 'self-help' not the causality of 'social physics'.<br />
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The early criticisms of Quetelet did not come from the innumerate, one of the severest critics of Quetelet was a famous mining engineer, Frederic Le Play, a graduate of the <i>Ecole Polytechnique</i> and the <i>Ecole Nationale Superieure des Mines</i>, centres of French rationalism and mathematics. Le Play felt that the direct observation of facts was achieved by the scientist, a trained specialist, closely observing phenomena, families for example, not by clerks trawling through reams of data. LePlay was not alone in his approach, but part of a much broader movement that dominated German and British science for the first half of the nineteenth century, <i>Naturphilosophie</i> or <i>Romantic science</i>.<br />
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Modern science is associated with objectivity, scientists should extract themselves from the world in order to be able to identify the 'truth', perfect knowledge. This objective was the motivation for Laplace's analysis of errors. While the Revolutionary French pursued truth, in Prussia, Immanuel Kant asked whether objectivity was ever really possible, and, primarily in Germany and empiricist Britain, these doubts evolved into a 'Romantic' view of science, <i>Naturphilosophie</i>. If Laplace championed Newton's mechanistic view that the universe was a giant clock, the Romantics saw it more as a complex, 'living' organism and looked to discover universal principles by observing individual subjects. Two key figures of associated with Romantic science are Charles Darwinand Alexander von Humboldt, both of whom explored the world, literally, travelling thousands of miles and observing nature in the raw. <br />
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The impact of <i>Naturphilosophie</i> on English science is discussed in Richard Holmes's book, <i><a href="http://www.amazon.co.uk/Age-Wonder-Romantic-Generation-Discovered/dp/0007149530" target="_blank">The Age of Wonder</a></i>. Holmes describes the period as a "second scientific revolution'', but in one way it was a counter-revolution, with a rejection of the mathematisation of science that had taken place in first scientific revolution and a return to Aristotelian methods of observation and qualitative description. <br />
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Possibly the most important legacy of <i>Naturphilosophie</i> was a shift in emphasis in science from considering the world 'as it is' to trying to understand 'how it changes'. Darwin is the best known example of this shift, biology was not just about the classification of living species but about trying to understand how the diversity of life had come about.<br />
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There was a problem with Romantic science: Was it objective? As<a href="http://www.amazon.co.uk/Science-Four-Thousand-Year-History/dp/0199580278" target="_blank"> Patricia Fara</a> explains<br />
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Victorian [i.e.1837-1901] scientists were appalled to think that subjectivity might lie at the very heart of science. .... Scientists were exhorted to exert self-discipline and behave as if they were recording instruments producing an objective view.</blockquote>
It was in this context that Quetelet's quantitative methods re-emerged in Britain. In 1850, Sir John Herschel, one of the key figures of the <i>Age of Wonder</i>, reviewed Quetelet's works and concluded that the Law of Errors was fundamental to science. In 1857, Henry Thomas Buckle published the first part of a <i>History of Civilisation in England</i>, which was an explanation of the superiority of Europe, and England in particular, based on Quetelet's social physics. Sir Francis Galton combined the work of his half-cousin, Charles Darwin, with that of Quetelet to come up with a statistical model of <i>Hereditary Genius</i> in the 1870s and in the process introduced the concepts of 'reversion to the mean' and statistical correlation. At the start of the twentieth century Galton's statistical approach, was championed by Karl Pearson who said that the questions of evolution and genetics were "in the first place statistical, in the second place statistical and only in the third place biological'', and the aim of biologists following this approach was to "seek hidden causes or true values'' behind the observed data processed with statistical tools. <br />
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Le Play's approach of synthesising a coherent narrative out of hundreds of special cases was forgotten. The methodology was related to the historical schools of economics and institutional economics. This ethos seems to have been smothered by the reductionism of modern science.<br />
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On the morning of the Monday following the Turing summit I listened to Helga Nowotny being interviewed about her new book, <i><a href="http://www.amazon.co.uk/Cunning-Uncertainty-Helga-Nowotny/dp/074568761X" target="_blank">The Cunning of Uncertainty</a> </i>where she notes that we have evolved to identify cause and effect, not connections that lead to complexity and result in uncertainty (around 16:20 on the <a href="http://open.live.bbc.co.uk/mediaselector/5/redir/version/2.0/mediaset/audio-nondrm-download/proto/http/vpid/p036x45y.mp3" target="_blank">podcast</a>). She then argues that there is no (economic) Theory of Innovation, all we have is case studies of innovation. Case studies are not bad, but describe a specific set of circumstances in a specific context. In this set up we are unable to create a predictive theory but this does not mean a thoughtful person cannot direct innovation, but it does imply we cannot create an algorithm to produce innovation. I thought Nowotny here was saying something relevant to economics, is it right toscorn the historical/institutional schools for delivering only case studies and not theories. Of course, most vernacular training comes from case studies and few practitioners value theory.<br />
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At this point one might ask, but what about "machine learning", surely an algorithm that learns could resolve the problems of big data. However, machine learning in banking is a problem. The "acid test" of a credit system is, apparently, that it delivers an audit trail as to how a specific decision was made. The decision needs to be able to be justified. The nature of machine learning, apparently, makes the task of justification difficult. As the machine learns the algorithm changes and the response to a set of inputs is unstable and it becomes difficult to follow the "learning machine's train of thought".<br />
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Now let us assume that an algorithm could be created that could make audit-able lending decisions by employing Bayesian techniques in conjunction with social media data. This seemed to be the utopia some of the bankers at the summit aspired to. But one wonders if the legal barriers imposed in the UK and US preventing the synthesis of social data and lending decisions were removed, the result would be that the experts at this synthesis, Google and Facebook, would be better placed to become banks than banks to become data mongers. The banks, as we know them, would fast disappear; the gods punish us by giving us what we pray for.<br />
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Is there an alternative for banks. I think so, go back to basics. Treat customers as individuals, not data points on a 50-dimensional space, employ staff who develop narratives around customers from which they can create an intuition about lending. Old fashioned banking based on the human and social sciences, not an algorithm driven mathematical science that even if it was possible could well lead to their demise.<br />
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<br />Tim Johnsonhttp://www.blogger.com/profile/06952723922503939504noreply@blogger.com0tag:blogger.com,1999:blog-3046071861494986299.post-90847017151627054892015-09-22T06:24:00.002-07:002015-09-22T06:24:47.148-07:00Building real markets for the good of the people<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The Bank of England is seeking to build an 'Open Forum' </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.6667px; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><i><a href="http://www.bankofengland.co.uk/markets/Pages/openforum.aspx" rel="nofollow" target="_blank">Building real markets for the good of the people</a></i></span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. I am participating in this forum and here I seek to address the questions </span></div>
<ul style="margin-bottom: 0pt; margin-top: 0pt;">
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Are reforms creating the soft and hard infrastructure to ensure FICC markets are effective and retain their social licence?</span></div>
</li>
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Where has too little been done? In some areas, might reform have gone too far? </span></div>
</li>
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Does the reform agenda form a coherent whole or are there gaps and inconsistencies? </span></div>
</li>
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">How should the programme of reform be made dynamic and adaptive to current and future innovations in markets? </span></div>
</li>
</ul>
<b id="docs-internal-guid-c2b0812e-f537-1266-7cf0-90455bfe050a" style="font-weight: normal;"><br /></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">In summary I believe the reforms focus on specific actions but do not address fundamental issues around how markets are perceived. This reflects the Bank’s desire to deliver concrete proposals to solve a range of specific problems. The risk is that the reforms tackle situations already identified and are not robust to new phenomena. </span></div>
<b style="font-weight: normal;"><br /></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The basis of my argument rests on a matter of fact: two hundred years ago banking, and commerce generally, was conceived of as being conducive to social order; today it is generally perceived as socially destructive. Before the nineteenth century, in theory, the primary concern of markets was fairness in exchange. Through the nineteenth century this concern was replaced by profit maximisation. I would assert that contemporary market malfeasance is a result of this transformation; practices become justified by a consequentialist argument that profits, however generated, are ultimately beneficial to society. </span></div>
<b style="font-weight: normal;"><br /></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The Bank and market regulators seek to correct market misconduct, in the main, by creating new rules and regulations; a deontological response. The weakness of this approach is that rules and regulations, necessarily, relate to specific situations and so are slow to evolve to new technologies. </span></div>
<b style="font-weight: normal;"><br /></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Both consequentialist and deontological moralities rely on predictability, something rarely encountered in markets. Consequentialism rests on an assumption that we are able to calculate the consequences of our actions and deontology that we can identify the set of possible situations that need proscribing. In the presence of uncertainty the ethicist should turn to character, or virtue, based morality. The Fair and Efficient Market’s Review recognises this and highlights the need to improve standards, professionalism and accountability, issues of character while the 3 ‘pillars’ of Basel reflect deontological (Pillar I) , character (Pillar II) and consequentialist (Pillar III) approaches.</span></div>
<b style="font-weight: normal;"><br /></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I believe that the Bank will struggle to actually deliver its objective of ‘Markets for All’ so long as market participants are taught to adhere a consequentialist ethic to maximise profits while the regulator focuses on developing rules to restrain these instincts. Alongside the work on strengthening rules and regulations in order to deliver ‘Markets for All’ I assert that the Bank of England must undertake a programme of work focussing on the culture of banking. </span></div>
<b style="font-weight: normal;"><br /></b><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Character is developed through practice in the context of a culture. This is reflected in the meaning of the Greek word at the root of ethics and the Latin word at the root of morality, both relate to practice. Thirty years ago many bankers, including Bank of England employees, started their careers directly from school as apprentices, learning their trade in practice. Today, the majority of City bankers will have gone through an academic training rooted in a consequentialist ethic and built on profit maximisation in the presence of scarcity. </span></div>
<b style="font-weight: normal;"><br /></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">While many see the decline in commercial ethics as being a recent phenomena, Milton Friedman, Reaganomics and Thatcherism are often mentioned, I point to the 1950 English Trust Law case, </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.6667px; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><i>Buttle v Saunders</i></span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> ([1950] 2 All ER 193), where in the High Court ruled that the fiduciary duty to maximise a client’s profits superceded any conception of commercial ethics, such as ‘my word is my bond’; introducing the practice of ‘gazumping’ into English commercial practice. I also highlight that at this time, because of the Bretton-Woods system, exchange rates, and hence interest rates and commodity prices, were fixed. That is, in 1950 the FICC markets were broadly predictable and in this environment the ideology of profit maximisation, formulated in the academic sphere, came to dominate financial practice. </span></div>
<b style="font-weight: normal;"><br /></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I have <a href="http://dx.doi.org/10.1007/s10551-014-2257-x" target="_blank">argued</a> that the current perception of markets as being competitive arenas designed to maximise profits is misguided. A truer conception of markets is as a response to radical uncertainty and that markets are forums, centres of discourse, where the aim is to reach a consensus on prices. This position is developed on the identification of reciprocity (fairness in exchange) as being deeply embedded in contemporary financial mathematics and reflects the origins of mathematical probability theory being in the ethical assessment of contingent contracts. Reciprocity, I argue, is a key ‘norm of market discourse’, along with charity and sincerity.</span></div>
<b style="font-weight: normal;"><br /></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">My case is based on the view that in the aftermath of the Enlightenment instrumental mindsets that sought to optimally achieve predetermined ends in the context of an underlying need to control external events emerged and dominated science. This approach is founded on an assumption of predictability, that emerged in the nineteenth century, and that fails in the face of radical uncertainty. </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Integral to my case is the view that western commercial practice has driven the development of both western science and western democracy. The explanation is that society learns about discourse in the marketplace, and discourse is at the basis of both democracy and science. Greek commerce was uniquely based on money and delivered a unique approach to science and politics. The commercial revolution of twelfth century Europe ended feudalism and resulted in Europe's mathematisation of physics. Thomas Gresham and Simon Stevin preceded Isaac Newton and Christiaan Huygens. This turns table on the conventional standpoint that commerce is built on science and democracy and emphasises the merit of markets. </span></div>
<b style="font-weight: normal;"><br /></b><span style="font-family: Arial; font-size: 14.6667px; line-height: 1.38; white-space: pre-wrap;">On this basis, my responses to the questions presented are as follows.</span><br />
<ul style="margin-bottom: 0pt; margin-top: 0pt;">
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: italic; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Are reforms creating the soft and hard infrastructure to ensure FICC markets are effective and retain their social licence?</span></div>
</li>
</ul>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-left: 36pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I cannot see (perhaps based on ignorance) initiatives to address the ‘soft’ infrastructure to the same extent as there are initiatives to address the ‘hard’ infrastructure. I am not surprised by this given Bank’s desire to deliver concrete actions to solve a range of specific problems, but I think the bones of the hard infrastructure are useless without the meat of the soft infrastructure.</span></div>
<b style="font-weight: normal;"><br /></b>
<ul style="margin-bottom: 0pt; margin-top: 0pt;">
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: italic; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Where has too little been done? In some areas, might reform have gone too far? </span></div>
</li>
</ul>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-left: 36pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I cannot find a clear vision of how the culture of Banking will be improved. There is a commitment to making the rules and regulations stronger but it is assumed that everyone agrees on what a market is and why it exists. I believe the Bank should bring clarity to this fundamental issue. As long as a market is seen by some as a panacea while others see it as demonic the ultimate objective of </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 14px; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> markets regaining their social license will be at risk. I believe the ‘Open Public Forum’ needs to deliver a generally accessible and widely agreed understanding of the role of markets.</span></div>
<b style="font-weight: normal;"><br /></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-left: 36pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">New financial technologies, such as crowdfunding, peer-to-peer lending and alternative currencies, are characterised by their distributed, non-centralised, nature. My case that markets are forums for achieving consensus is more sympathetic to these new technologies than the conventional approach that markets are to maximise profits. The new financial mechanisms have been reviewed by regulators. There is concern that regulators will force the emergent mechanisms to mimic existing structures, which are profit maximising, destroying their beneficial distinctiveness and the FCA consultation was debated in the UK Parliament (18 December 2013, `Crowdfunding and the FCA'). and during the debate it was observed that the UK has the potential to be the global leader in crowdfunding because the US SEC has over-regulated it and “strangled the baby at birth''. </span></div>
<b style="font-weight: normal;"><br /></b>
<ul style="margin-bottom: 0pt; margin-top: 0pt;">
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: italic; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Does the reform agenda form a coherent whole or are there gaps and inconsistencies? </span></div>
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</ul>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-left: 36pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I don’t think the reform agenda is incoherent and implicit in the agenda is a desire to address the culture of banking. However I do not think this is explicit and so will be lost.</span></div>
<b style="font-weight: normal;"><br /></b>
<ul style="margin-bottom: 0pt; margin-top: 0pt;">
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: italic; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">How should the programme of reform be made dynamic and adaptive to current and future innovations in markets? </span></div>
</li>
</ul>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-left: 36pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I would argue that the Bank should promote dialogue and research on the how markets are perceived. Whilst finance is in the midst of an ethical crisis it is also undergoing significant change driven by technology and there is significant public interest in finance, unprecedented in recent history. Because markets are intrinsically unpredictable and it is impossible to identify how they will evolve, what is needed is to harness this interest in honest discourse about how markets should develop. </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-left: 36pt; margin-top: 0pt;">
<span style="font-family: Arial; font-size: 14.6667px; white-space: pre-wrap;"><br /></span></div>
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<span style="font-family: Arial; font-size: 14.6667px; white-space: pre-wrap;">Finance, science and democracy are all failing to deliver a robust consensus on important issues, can finance return to its ethical roots and teach the other domains how it is done?</span></div>
Tim Johnsonhttp://www.blogger.com/profile/06952723922503939504noreply@blogger.com1tag:blogger.com,1999:blog-3046071861494986299.post-27943857717277779222015-06-23T04:28:00.002-07:002015-06-23T04:28:59.141-07:00Does the hidden hand need to hold a stake in society?As the father of a four year old daughter, I have been to the cinema to see the the Disney film, <a href="http://www.imdb.com/title/tt2483260/" style="font-style: italic;" target="_blank">Tinkerbell and the Pirate Fairy</a>. When I took my daughter to the cinema I had taken an mp3 player as I anticipated I would need a diversion, however I became engrossed in the film. <br />
<br />
The film tells the story of how a 'fairy scientist', Zarina, undertook an experiment, which went wrong. In response, Zarina left the fairy kingdom, taking pixie dust, and got involved with the young Captain Hook. Hook had convinced Zarina that they were a team, but in fact the pirate was using the fairy so that he could use Zarina's knowledge of pixie dust to get his ship to fly in order that he could become the most powerful pirate. Eventually, other fairies, led by Tinkerbell, rescued Zarina, by showing who her friends really were, and she was bought back into the fairy-fold.<br />
<br />
I saw the film around the time I spoke at the <a href="http://www.nottingham.ac.uk/conference/fac-sci/circling-the-square/index.aspx">Circling the square: Research, politics, media and impact</a> conference last year and there was coverage of the <a href="http://transhumanity.net/researchers-ahoy-should-futurist-science-move-offshore/" target="_blank">idea</a> that U.S. high tech firms were considering going 'off-shore' so that they would escape regulation. On the face of it, there seemed to be a connection between Captain Hook and the <a href="http://www.bloomberg.com/news/articles/2014-05-30/for-libertarian-utopia-float-away-on-startup-nation" target="_blank">Seasteading Institute</a> or <a href="http://www.salon.com/2014/06/06/techs_toxic_political_culture_the_stealth_libertarianism_of_silicon_valley_bigwigs/" target="_blank">Andreessen Horowitz</a>.<br />
<br />
These thoughts returned to me while reading Albert Hirschman's <a href="http://press.princeton.edu/titles/10110.html" style="font-style: italic;" target="_blank">The Passions and the Interests: Political Arguments for Capitalism before Its Triumph</a> on the advice of <a href="https://twitter.com/tcspears" target="_blank">@tcspears</a>. From the back-cover<br />
<blockquote class="tr_bq">
In this volume, Albert Hirschman reconstructs the intellectual climate of the seventeenth and eighteenth centuries to illuminate the intricate ideological transformation that occurred, <b>wherein the pursuit of material interests - so long condemned as the deadly sin of avarice - was assigned the role of containing the unruly and destructive passions of man</b>. Hirschman here offers a new interpretation for the rise of capitalism, one that emphasizes the continuities between old and new, in contrast to the assumption of a sharp break that is a common feature of both Marxian and Weberian thinking.</blockquote>
Hirschman begins his story with Machiavelli and highlights the following paragraph in Chapter 15 of <i><a href="http://www.feedbooks.com/book/94" target="_blank">The Prince</a></i><br />
<blockquote class="tr_bq">
But since it is my [Machiavelli's] object to write what shall be useful to whosoever understands it, it seems to me better to follow<b> the real truth of things than an imaginary view of them. For many Republics and Princedoms have been imagined that were never seen or known to exist in reality</b>. And the manner in which we live, and that in which we ought to live, are things so wide asunder, that he who quits the one to betake himself to the other is more likely to destroy than to save himself; since any one who would act up to a perfect standard of goodness in everything, must be ruined among so many who are not good. It is essential, therefore, for a Prince who desires to maintain his position, to have learned how to be other than good, and to use or not to use his goodness as necessity requires.</blockquote>
In 1532 Machiavelli appears to be making precisely the same point as behavioural economists make today, it beggars the question: what progress have we made in almost 500 years?<br />
<br />
Hirschman identifies this passage as the start of the 'fact-value dichotomy' that features in Hobbes, Spinoza, Rousseau and, most famously (for English speakers?) in Hume. It reminded me that during the Enlightenment, when the consensus was on the dominance of the passions, today the fact-value dichotomy is invoked to ensure policy is guided by positivist, 'rational', arguments.<br />
<br />
Before the nineteenth century the view was that humans, as they really are, are governed by their passions (in particular, lust, the excessive passion for love; pride, the excessive passion for honour, and avarice, the excessive passion for wealth) and during the seventeenth century there was discussion of how a damaging passion can be harnessed by another passion: a person sublimates their adulterous lust by their desire to be honoured.<br />
<br />
Hirschman notes that these thought processes originate in political theory, where the entity in question is the state, but they become applied to individuals, or in the case of <a href="http://en.wikipedia.org/wiki/The_Fable_of_the_Bees" target="_blank">Mandeville</a>, how a skilled politician should be able to harness the passions of the people to the benefit of the state. In particular, Mandeville identifies how personal avarice can be used to temper the other passions. <br />
<br />
In Hirschman's account 'Interests' become the main tamers of passions and by the nineteenth century they are equated with wealth, due mainly to Adam Smith and from this point individual profit maximisation emerges as a virtue that results in public good. Interests guide the hidden hand.<br />
<br />
Hirschman notes that the noun 'interest' is difficult, and this is covered in the current edition of the Oxford English dictionary:<br />
<blockquote class="tr_bq">
There is much that is obscure in the history of this word, first as to the adoption of Latin <i>interest</i> as a noun, and secondly as to the history of the Old French sense ‘damage, loss’. No other sense is recorded in French until the 16th cent. As this was not the 15th cent. sense of English <i>interess</i>(<i>e)</i>, it is curious that the form of the French word should have affected the English. The relations between the sense-development in French and English in 16–17th cent. are also far from clear.</blockquote>
The main meaning of the word 'interest' is<br />
<blockquote class="tr_bq">
<blockquote class="tr_bq">
1. The relation of being objectively concerned in something, by having a right or title to, a claim upon, or a share in.</blockquote>
<blockquote class="tr_bq">
a. The fact or relation of being legally concerned; legal concern in a thing; esp. right or title to property, or to some of the uses or benefits pertaining to property; </blockquote>
</blockquote>
with the earliest example coming from 1450 "Noon of youre Liege peple hafuyng <u>interest</u>, right or title, of or in ony of the premisses." and in 1478 we have "He neuer knywe..þat I hadde any clayme or <u>entrest</u> in the maner off Heylesdon.". <br />
<br />
Relevant to our discussion is the second definition<br />
<blockquote class="tr_bq">
<blockquote class="tr_bq">
2.a. The relation of being concerned or affected in respect of advantage or detriment; esp. an advantageous relation of this kind.</blockquote>
</blockquote>
with a 1533 use "<u>Without interest we commit sinne</u>, seeyng peyne commyng withall." This is significant as it highlights the role of interests in repressing sin.<br />
<blockquote class="tr_bq">
<blockquote class="tr_bq">
b. That which is to or for the advantage of any one; good, benefit, profit, advantage.</blockquote>
</blockquote>
with a 1579 example "Caried with ambicious respectes touching their <u>interests</u> and desires particular."<br />
<br />
The OED places the financial meaning as secondary, but older:<br />
<blockquote class="tr_bq">
II. Senses related to medieval Latin <i>interesse</i>, as used by Matthew Paris a1259, and frequently from 13th c. (see Du Cange), in the phrase <i>damna et interesse</i>, in French legal phraseology d<i>ommages et intérêts</i>, the indemnity due to any one for the damage and prejudice done to him. Cf. Old French <i>interest</i> (1290 in Godef.) in sense ‘damage’, also recompense for damage done or caused, ‘damages’. In sense 10 French interest (now <i>intérêt</i>) occurs in Rabelais, 1535.</blockquote>
<blockquote class="tr_bq">
9.a. Injury, detriment. </blockquote>
<blockquote class="tr_bq">
9.b. Compensation for injury, ‘damages’. (French <i>dommages et intérêts</i> medieval Latin <i>damna et interesse</i>.) Obs. rare.</blockquote>
and the examples are two hundred years older than the common meaning: 1259 <i>Propter usuras, pœnas,et </i><u style="font-style: italic;">Interesse</u>, or 1274 <i>Tam super principali, quam super custibus, dampnis, et <u>interesse</u> refundendis</i><br />
<br />
and the penultimate meaning is the technical, financial, meaning<br />
<blockquote class="tr_bq">
10. a. Money paid for the use of money lent (the principal), or for forbearance of a debt, according to a fixed ratio (rate per cent.).</blockquote>
<blockquote class="tr_bq">
In medieval Latin <i>interesse</i> (Interest) differed from <i>usura</i> (Usury) in that the latter was avowedly a charge for the use of money, which was forbidden by the Canon Law; whereas originally ‘<i>interesse</i> refers to the compensation which under the Roman Law, was due by the debtor who had made default. The measure of compensation was <i>id quod interest</i>, the difference between the creditor's position in consequence of the debtor's laches and the position which might reasonably have been anticipated as the direct consequence of the debtor's fulfilment of his obligation’. This compensation was always permissible when it could be shown that such loss had really arisen (<i>damnum emergens</i>). At a later period, <i>lucrum cessans</i>—loss of profit through inability to reinvest—was also recognized as giving a claim to <i>interesse</i>; both cases appear to be included in the formula <i>damna et interesse</i>. The <i>interesse</i> was originally a fixed sum specified in the contract; but a percentage reckoned periodically, so as to correspond to the creditor's loss, was afterwards substituted (as sometimes in England in the first half of the 13th cent.). Interest in the modern sense was first sanctioned by law (though apparently under cover of the mediæval theory) by 37 Hen. VIII, c. 9 (see quot. 1545); this statute was repealed in 1552, but re-enacted in 1571.</blockquote>
<blockquote class="tr_bq">
1529 King Henry VIII Instr. Orator Rome, Which money..shalbe truely repayde with <u>interesse</u>.</blockquote>
<blockquote class="tr_bq">
1545 Act 37 Hen. VIII c. 9 §3 Be it also enacted..that no person or persons..by way or meane of any corrupte bargayne, loone, eschaunge, chevisaunce, shifte, <u>interest</u> of any wares..accepte or take, in lucre or gaynes, for the forbearinge or givinge daye of payment of one hole yere of and for his or their money..above the sume of tenne poundes in the hundred.</blockquote>
Originally interest was the charge a debtor had to pay a creditor for non-repayment, it was a compensation payment. In the Middle Ages, this <i>damnum emergens </i>became<i> </i><i>lucrum cessans</i>, a payment from the borrower to the lender in compensation for the loss of investment opportunities available to the lender. Over time interest came to indicate "a right or title to, a claim upon, or a share in" something.<br />
<br />
It is here that I see the crux, <b>interests imply a stake suggesting that the hidden hand will only work if an individual has a stake in society</b>.<br />
<blockquote class="tr_bq">
</blockquote>
One aspect of Hirschman's account that had me thinking is that the implication was there is an internal dialogue taking place within individuals, there was no reference to the external, cultural pressures, on an individual. <br />
<br />
The reason I thought about this is that when faced with a moral decision, I am not concious of sublimating one passion with another, rather I am concious of peer-pressure, what my friends and family might think of me. I guess in the framework that Hirschman presents this would be covered by 'honour', and maybe explicitly highlighting the fear of shame, a feature of Calvinism, might not be well received by an 'Enlightened' audience. Another explanation could be that the likes of Montesquieu, Hume and Smith took it as given that an individual is a part of the society that they will improve by pursuing their personal interests. None the less, it struck me that if the individual is set adrift from their society and culture, their morals are likely to be compromised (anyone who has experienced working as an <i>ex patriate</i> might be familiar with this phenomenon; I witnessed it working in Abu Dhabi in the 1990s, where adultery was the norm amongst westerners, not the exception). This to me is a the heart of <i>The Pirate Fairy</i>, and a central risk of Seasteading.<br />
<br />
One character whom one might expect to appear in Hirschman's account, but does not, is <a href="http://en.wikipedia.org/wiki/Hugo_Grotius" target="_blank">Hugo Grotius</a>. Grotius is widely regarded as setting the foundations of international relations in the modern era and <a href="https://www.palgrave.com/page/detail/the-anarchical-society-hedley-bull/?K=9780230393387" target="_blank">Hedley Bull</a> describes a contemporary interpretation of Grotius' theory of 'international society' as<br />
<blockquote class="tr_bq">
A society of states (or international society) exists when a group of states, conscious of certain common interests and common values, form a society in the sense that they conceive themselves to be bound by a common set of rules in their relations with one another, and share in the working of common institutions. If states today form an international society . . . this is because, recognising certain common interests and perhaps some common values, they regard themselves as bound by certain rules in their dealings with one another, such as that they should respect one another's claims to independence, that they should honour agreements into which they enter, and that they should be subject to certain limitations in exercising force against one another. </blockquote>
On the basis of Hirschman's claim that during the seventeenth and eighteenth centuries, philosophers adapted state-craft to individual behaviour, I think we can gain insight into the role of interests in guiding the hidden hand by replacing 'state' with 'individual' in the above quotation.<br />
<br />
My intuition is that if people become alienated from society then we can't rely on their self-interest promoting the well-being of society, as proposed by Smith and others. When Zarina becomes alienated from the other fairies she loses here good judgement. Whether Seasteaders can construct a 'new Jerusalem', as the puritan immigrants to north America set out to do in the seventeenth century, remains to be seen. But I am doubtful: the 'founding fathers' had a definite moral compass that bound them together, not an infantile desire to do as they see best justified by their personal wealth.<br />
<br />
Mark Carney's recent <a href="http://www.bankofengland.co.uk/publications/Documents/speeches/2015/speech821.pdf" target="_blank">Mansion House</a> speech touches on some of these issues. For example, when Carney argues that<br />
<blockquote class="tr_bq">
The Bank of England’s general approach was consistent with the attitude of FICC markets, which historically relied heavily on informal codes and understandings. That informality was well suited to an earlier age. But as markets innovated and grew, it proved wanting. </blockquote>
can the "informality was well suited to an earlier age" be interpreted as that when the City was less 'global', and market participants closer to each other, they shared 'common interests' which become diluted as traders become separated and potentially alienated (as in the case of Zarina).<br />
<br />
Carney goes on to argue that "Real markets are resilient, fair and effective. They maintain their social licence." and "Real markets don’t just happen; they depend on the quality of market infrastructure." Developing these themes, he highlights the final report the <a href="http://www.bankofengland.co.uk/markets/Documents/femrjun15.pdf" target="_blank">Fair and Effective Markets Review</a>, noting that<br />
<blockquote class="tr_bq">
Firms’ systems of internal governance and control that were incapable of asserting the <u>interests</u> of firms – let alone the wider market – over those of close-knit trading staff;</blockquote>
highlighting how market participants must share common interests that transcend the local interests of trading cliques. Carney goes on to observe that the result was<br />
<blockquote class="tr_bq">
All these factors contributed to an ethical drift. Unethical behaviour went unchecked, proliferated and eventually became the norm. Too many participants neither felt responsible for the system nor recognised the full impact of their actions. For too many, the City stopped at its gates, though its influence extended far beyond. </blockquote>
I am fairly sure that these comments are relevant as much to those advocating Seasteading as Fixed Income, Currencies and Commodity traders cast adrift from broader society.Tim Johnsonhttp://www.blogger.com/profile/06952723922503939504noreply@blogger.com2tag:blogger.com,1999:blog-3046071861494986299.post-66715271902033446152015-06-06T08:22:00.000-07:002015-06-06T10:04:18.978-07:00Finance and Mathematics: where is the ethical malaise?<span style="font-family: inherit; font-size: large;"><i>This is a draft of an article that has been accepted by <span style="background-color: white; color: #222222; line-height: 18.4799995422363px;"><a href="http://link.springer.com/journal/283" style="color: #888888; text-decoration: none;">The Mathematical Intelligencer</a> and offers an argument very similar to Romer's 'mathiness' argument as discussed in my <a href="http://magic-maths-money.blogspot.co.uk/2015/06/mathiness-not-just-problem-of-macro.html" rel="nofollow" target="_blank">previous pos</a>t.</span></i></span><br />
<br />
Discussions of the role of mathematics in finance appearing in <span class="cmti-12">The Mathematical Intelligencer</span>
can be split into two classes. Marc Rogalski [<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XR_FMEM">26</a>] and Jonathan Korman [<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XK_FMLD">18</a>] capture a widespread
fury at a collapse in commercial ethics while Ivar Ekeland [<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XE_RtR">6</a>] and Peter Haggstrom [<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XH_MWF">13</a>] offer
economic facts. The conclusions of Rogalski and Korman can be summarised as that mathematicians
should spurn the financial world; Haggstrom and Ekeland point to technocratic solutions,
characterised by better regulation. I do not buy into the argument that the problems of
finance can be solved by regulations, it is, as both the U.K. and U.S. governments have
identified<span class="footnote-mark"><a href="https://www.blogger.com/FaM22.html#fn1x0"><sup class="textsuperscript">1</sup></a></span><a href="https://www.blogger.com/null" id="x1-2f1"></a>,
an ethical problem. But I also do not think it is virtuous for mathematicians to spurn
finance, so I am not completely aligned with Rogalski or Korman. My position is that
mathematicians should be forthright in presenting financial mathematics as a discipline
centred on the concept of justice, making it explicit that successful finance must be moral
finance.
<!--l. 45--><br />
<br />
<div class="indent">
During the Financial Crisis of 2007-2009 I was the U.K. Research Council's Academic Fellow' in
Financial Mathematics, meaning my background is, like Ekeland and Haggestrom, that of a financial
mathematics insider'. In this role I was expected to explain the discipline I represented to U.K.
policy makers, both in government and in the media. As I attempted to meet these expectations I
took an unconventional step for a mathematician and started looking into the origins of
mathematical probability, both technically and the cultural context. I noticed that in solving the
Problem of Points, in 1654, Pascal and Fermat were pricing a derivative contract on a binomial tree,
and their solution would today be recognised as the Cox-Ross-Rubinstein option pricing model,
published in 1978. There was a difference between the 1654 and 1978 models, CRR give a
methodology for identifying the branch probabilities on the tree, Pascal and Fermat assume they are
a half. This raised the question: how did Pascal and Fermat conceive the probabilities they
used?
<!--l. 47--><br />
<br /></div>
<div class="indent">
The answer came, initially, in some work the historian Edith Dudley Sylla did in the process of
translating the <span class="cmti-12"><i>Ars Conjectandi</i></span>. Sylla observes that
</div>
<div class="quote">
<div class="noindent">
<blockquote class="tr_bq">
equity among associates or partners rather than probabilities in the sense of relative
frequencies provided the foundation for the earliest mathematical probability
theory.[<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XS_CAT">28</a>, p 13]</blockquote>
</div>
</div>
<div class="quote">
<!--l. 53-->and that<br />
<div class="noindent">
<blockquote class="tr_bq">
the foundations (...) [were] not chance (frequentist probability), but rather <span class="cmti-12">sors</span>
(expectation) in so far as it was involved in implicit contracts and the just
treatment of partners.[<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XS_CAT">28</a>, p 28]</blockquote>
</div>
</div>
<!--l. 56--><br />
<div class="indent">
Intrigued by this point, I followed the path of mathematical probability from the origins of
western mathematics in Fibonacci's text on financial mathematics, the <span class="cmti-12">Liber Abaci</span>, to
contemporary mathematics' <span class="cmti-12">Fundamental Theorem of Asset Pricing</span>. The <span class="cmti-12">Fundamental</span>
<span class="cmti-12">Theorem </span>is a consequence of Black and Scholes' paper on pricing options [<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XBS_73">2</a>] that is based
on the arbitrage argument, which originates in Aristotle's discussion of justice in
commercial exchange in <span class="cmti-12"><i>Nicomachean Ethics</i> </span>and features in the <span class="cmti-12"><i>Liber Abaci</i></span>. The novelty
of contemporary financial mathematics is not in the techniques used, or the products
traded<span class="footnote-mark"><a href="https://www.blogger.com/FaM23.html#fn2x0"><sup class="textsuperscript">2</sup></a></span><a href="https://www.blogger.com/null" id="x1-3f2"></a>, but
in the fact that, today, mathematicians approach the problem of one of positive' science, not normative'
ethics. For example, Black and Scholes opens with the observation that it should not be possible to make
sure profits<span class="footnote-mark"><a href="https://www.blogger.com/FaM24.html#fn3x0"><sup class="textsuperscript">3</sup></a></span><a href="https://www.blogger.com/null" id="x1-4f3"></a>,
appealing to a consequentialist argument that if you get your price
wrong<span class="footnote-mark"><a href="https://www.blogger.com/FaM25.html#fn4x0"><sup class="textsuperscript">4</sup></a></span><a href="https://www.blogger.com/null" id="x1-5f4"></a>
someone will bankrupt you, where as medieval merchants were conscious of the Catholic Church's
injunction that a riskless profit was <span class="cmti-12"><i>turpe lucrum</i> </span>(filthy money).
<!--l. 60--><br />
<br /></div>
<div class="indent">
Back in 2009, at the start of this journey, I took a position similar to Ekeland: there are
economic laws that outweigh the puny might of mathematicians and the solution is in
the hands of regulators. Today I have a darker view of the role of mathematics in the
markets.
<!--l. 64--><br />
<br /></div>
<div class="indent">
European science is often distinguished from other cultures' science by
the fact that it is mathematicised and there is an argument, first offered in
1934<span class="footnote-mark"><a href="https://www.blogger.com/FaM26.html#fn5x0"><sup class="textsuperscript">5</sup></a></span><a href="https://www.blogger.com/null" id="x1-6f5"></a>
but developed more recently [<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XH_OSM">12</a>, <a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XK_ENFC">17</a>], that this came out of Aristotle's examination of ethics in
commerce. Justice in exchange is distinguished from distributive and restorative justice by Aristotle
as being characterised by equality, there is no giving in exchange, it is a reciprocal
arrangement essential in binding society together and for social cohesion [<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XK_ENFC">17</a>, p 51; <a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XBR_ANE">3</a>,
1133a15-30]. It is notable that Aristotle approached this ethical problem mathematically,
since he rarely applied mathematics to the physical world elsewhere [<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XH_OSM">12</a>, p 75; <a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XC_MR">4</a>, p 13; <a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XBR_ANE">3</a>,
1094b15-28]. On this basis, the medieval Scholastic scholars realised that money was
a universal measure, up until then Hellenic thought (including Islamic scholarship of
the time) had considered different physical properties, such as time and space, to be
incommensurable' - it was impossible to represent momentum, mass x length/time, mathematically
- and it was this property of money as a universal measure that enabled the development
of modern physics based on mathematics [<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XC_MR">4</a>, <a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XK_ENFC">17</a>]. To appreciate the point, Copernicus
wrote on money before he wrote on the planets; Stevin, founder of the influential Dutch
Mathematical School, was a financier; the financier Gresham endowed the first chair
of mathematics in England and laid the foundations for the Royal Society. Recently,
Bernard Bru has explained the significance of Bachelier's experience of stock-markets in the
development of Kolmogorov's ideas on probability [<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XT_BAHT">30</a>, pp 20-21]. The close relationship between
mathematics and finance is born out of the fact that finance is concerned with relations,
measured as prices, between objects. Finance informs mathematics on measurement and
uncertainty while mathematics is critical to finance because we cannot perform experiments in
the economy. It might not be possible to divorce the two disciplines, even if we wanted
to.
<!--l. 66--><br />
<br /></div>
<div class="indent">
The classicist Richard Seaford offers some insight into this account when he goes into the roots of
western thought and argues that Greek philosophy, including democracy and mathematics,
are a consequence of Archaic Greece's use of money [<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XS_MEGM">27</a>]. He notes that other ancient
civilisations were based on centralised re-distribution, where as pre-Socratic Greek society was
based on exchange, reliant on a conception of equality and reciprocity. He suggests that
when the Pythagoreans assigned a number to every object, they were, in fact, pricing the
object.
<!--l. 68--><br />
<br /></div>
<div class="indent">
The view that finance is socially corrosive is more novel than the practices of finance. One way of
approaching Shakespeare's <span class="cmti-12"><i>The Merchant of Venice</i> </span>is as a study of the four natures of love - erotic,
familial, friendship and the highest form of love - charity/<span class="cmti-12">caritas</span>/<span style="font-family: inherit;">agapi</span><span class="cmmi-12"> </span>- and Shakespeare
personifies charity in the form of Antonio, the merchant of Venice. Throughout the seventeenth and
eighteenth century, commerce was considered a civilising influence, in <span class="cmti-12"><i>The Rights of Man</i> </span>(1792)
Thomas Paine writes commerce is a pacific system, operating to cordialise mankind following a path laid by Montesquieu, Hume, Condorcet and Adam Smith [<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XH_RIMS">15</a>, <a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XFH_MVM">8</a>].<br />
<br />
After
the Industrial Revolution, these attitudes all but disappeared and today it would be
inconceivable to personify Christian love in the form of a merchant. An explanation for this
cultural shift can be found in <span class="cmti-12"><i>Dialectic of Enlightenment</i> </span>[<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XAH_DE">1</a>] where it is argued that the
Enlightenment led to the objectification of nature and its mathematisation, which in turn leads to
instrumental mindsets' that look to optimally achieve predetermined ends in the context
of an underlying need to control external events. Where as during the seventeenth and
eighteenth centuries public spaces emerged, the public sphere, which facilitated rational
discussion that sought the truth in support of the public good, through the nineteenth
century, mass circulation mechanisms came to dominate the public sphere and these
were controlled by private interests. As a consequence, the public became consumers of
information rather than creators of a consensus through engagement with information
[<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XH_STPS">11</a>].
<!--l. 74--></div>
<div class="indent">
<br />
One aspect of this process of alienation for the public is the attitude that mathematics is an
almost mystical pursuit that can reveal hidden truths, but only for the initiated, a recurring theme
in the presentation of mathematics in popular culture. This is nicely captured in a documentary film
on the development of the Black-Scholes-Merton equation where the economist Paul Samulelson
describes how he discovered' Bachelier's thesis, much as Indiana Jones might discover a magical
artefact,</div>
<div class="quote">
<div class="noindent">
<blockquote class="tr_bq">
In the early 1950s I was able to locate by chance this unknown book by a French
graduate student in 1900 rotting in the library of the University of Paris and when I
opened it up it was as if a whole new world was laid out before me.<span class="footnote-mark"><a href="https://www.blogger.com/FaM27.html#fn6x0"><sup class="textsuperscript">6</sup></a></span></blockquote>
<a href="https://www.blogger.com/null" id="x1-7f6"></a></div>
</div>
<!--l. 79--><br />
<div class="indent">
This trope might seem benign in the context of popularising mathematics, but when combined
with the idea that mathematics is immutable and indubitable, themes of traditional histories and
philosophies of mathematics, we are given the impression, to paraphrase William Tait,
that</div>
<div class="quote">
<div class="noindent">
<blockquote class="tr_bq">
A mathematical proposition is about a certain structure, such as financial markets.
It refers to prices and relations among them. If it is true, it is so in virtue of a
certain fact about markets. And this fact may obtain even if we do not or cannot
know that it does. [<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XT_TP">29</a>, p 341]</blockquote>
</div>
</div>
<!--l. 83--><br />
<div class="noindent">
While mathematicians themselves might not make this claim explicitly, mathematics has been used by
many to obscure and legitimise financial activity, passing over any consideration of the ethical
implications of those activities. Ekeland might see mathematics as puny', but others value its
authority and there are too many examples of how mathematics has been employed to
prevent democratic oversight of the markets. In their submission to the Parliamentary
Commission on Banking Standards in 2013 the Bank of England was highly critical of how
some firms have used advanced mathematical techniques to pull the wool' over the eyes
of the regulator [<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XPCBS">22</a>, v. II, para. 89] while U.S. authorities identified that this type of
mathematical sleight of hand played a part in the London whale' episode [<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#Xwhale">23</a>, p 14]. The
existence of the Gaussian copula as a 'truth-teller' of the value of complex debt portfolios
played a central role in the Crisis of 2007-2009, justifying the actions of banks, despite
its short-comings being known to mathematicians [<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XT_FG">31</a>, <a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XM_CC">21</a>, <a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XG_RFM">9</a>]. In the early 1970s, the
Black-Scholes-Merton framework played an important part in legitimising the re-emergence of
financial derivatives markets [<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XENC">20</a>, p 158]. As long ago as 1877 a large, corporate, insurer defended
their actions in undermining fraternal/mutual insurers to legislators with the argument
that</div>
<div class="quote">
<div class="noindent">
<blockquote class="tr_bq">
There are certain fundamental rules which can only be understood by actuaries,
and it is impossible for me to go into here [<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XL_FF">19</a>, p 198]</blockquote>
</div>
</div>
<!--l. 88--><br />
<div class="indent">
An antidote to the causes and consequences of instrumental mindsets' identified above is to turn
away from the philosophical paradigm of Foundationalism, which sees language as being made up of
statements that are either true or false and complex statements are valid if they can be deduced
from true primitive statements. This approach is exemplified in the standard mathematical
technique of axiom-theorem-proof. An alternative approach is to shift the focus from what language
says (true or false) to what it does. Specifically, the function of language is to enable different
people to come to a shared understanding and achieve a consensus, this is defined as
discourse<span class="footnote-mark"><a href="https://www.blogger.com/FaM28.html#fn7x0"><sup class="textsuperscript">7</sup></a></span><a href="https://www.blogger.com/null" id="x1-8f7"></a>
[<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XH_TCA">10</a>]. Because discourse is based on making a claim, the claim being challenged and then justified, to
be successful discourse needs to be governed by rules, or norms. The most basic rules are logical and
semantic, on top of these are norms governing procedure, such as sincerity, and finally there are
norms to ensure that discourse is not subject to coercion or skewed by inequality. This is why
reciprocity is central to financial mathematics, it is a norm of market discourse, embedded in the
language of mathematics.
<!--l. 90--><br />
<br /></div>
<div class="indent">
Mathematics has not been passive in recent financial crises and I would argue that if mathematicians
are not part of the solution, they are part of the problem. For me, the correct response of
mathematicians to the financial crises is to work in support of those who wish to redirect finance
from regarding markets as competitive arenas to seeing them as centres of cooperative, democratic,
discourse<span class="footnote-mark"><a href="https://www.blogger.com/FaM29.html#fn8x0"><sup class="textsuperscript">8</sup></a></span><a href="https://www.blogger.com/null" id="x1-9f8"></a>.
In this vein I have developed the argument [<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XJ_RFFE">16</a>] that reciprocity is the central message of financial
mathematics and it is one of three norms of market discourse, the others being sincerity and charity.
For this case to be coherent I have followed Putnam [<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XP_CFVD">25</a>] and abandoned the idea of mathematics
being a value-neutral truth-teller, rather it is a means of discourse. This is a significant
step if you perceive mathematics as being monogamous with the natural and physical
sciences, or even celibate. I believe certain twentieth century mathematicians, such as
Poincaré<span class="footnote-mark"><a href="https://www.blogger.com/FaM210.html#fn9x0"><sup class="textsuperscript">9</sup></a></span><a href="https://www.blogger.com/null" id="x1-10f9"></a>
[<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XH_HPTPS">14</a>], Ramsey [<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299#XE_RPPCT">5</a>] and Putnam, would have sympathy with the approach I take, particularly in the
cases where mathematics is employed in the social and human sciences.
<br />
<br />
<b><u>Notes</u></b></div>
<div class="footnote-text">
<!--l. 43--><br />
<div class="indent">
<span class="footnote-mark"><a href="https://www.blogger.com/null" id="fn1x0"> <sup class="textsuperscript">1</sup></a></span><span class="cmr-10">In the U.S. Financial Crisis Inquiry Commissions report of 2011 and the U.K. Changing Banking for Good</span>
<span class="cmr-10">report of 2013.</span></div>
</div>
<div class="footnote-text">
<!--l. 56--><br />
<div class="indent">
<span class="footnote-mark"><a href="https://www.blogger.com/null" id="fn2x0"> <sup class="textsuperscript">2</sup></a></span><span class="cmr-10">Most of these products existed in medieval times, the Triple Contract shares the features of structured</span>
<span class="cmr-10">products prominent in the crisis. Mortgage Backed Securities were introduced in the U.S. in the late nineteenth</span>
<span class="cmr-10">century see [</span><a href="https://www.blogger.com/FaM2.html#XL_FF"><span class="cmr-10">19</span></a><span class="cmr-10">, Ch 5] for an enlightening account. It is not in the interests of well dressed bankers to tell their</span>
<span class="cmr-10">clients that what they are charging fat fees for existed before Columbus.</span></div>
</div>
<div class="footnote-text">
<!--l. 56--><br />
<div class="indent">
<span class="footnote-mark"><a href="https://www.blogger.com/null" id="fn3x0"> <sup class="textsuperscript">3</sup></a></span><span class="cmr-10">This is the basis of Ekelands argument.</span></div>
</div>
<div class="footnote-text">
<!--l. 56--><br />
<div class="indent">
<span class="footnote-mark"><a href="https://www.blogger.com/null" id="fn4x0"> <sup class="textsuperscript">4</sup></a></span><span class="cmr-10">Ramseys Dutch book argument, which has been described as a modern version of the Golden Rule, Do</span>
<span class="cmr-10">unto others as you would have them do unto you, Luke 6:31.</span></div>
</div>
<div class="footnote-text">
<!--l. 64--><br />
<div class="indent">
<span class="footnote-mark"><a href="https://www.blogger.com/null" id="fn5x0"> <sup class="textsuperscript">5</sup></a></span><span class="cmr-10">By the Marxist theoretician Borkenau in </span><span class="cmti-10">The Transition from the Feudal to the Bourgeois World</span>
<span class="cmti-10">View</span><span class="cmr-10">.</span></div>
</div>
<div class="footnote-text">
<!--l. 76--><br />
<div class="noindent">
<span class="footnote-mark"><a href="https://www.blogger.com/null" id="fn6x0"> <sup class="textsuperscript">6</sup></a></span><span class="cmr-10">The programme is The Midas Formula also known as The Trillion Dollar Bet and is available</span>
<span class="cmr-10">on YouTube. The relevant section is around 12:20/48:53 minutes. A transcript is available at</span>
<span class="cmtt-10">http://www.bbc.co.uk/science/horizon/1999/midas</span><span class="cmtt-10">_script.shtml</span><span class="cmr-10">.</span></div>
</div>
<div class="footnote-text">
<!--l. 88--><br />
<div class="indent">
<span class="footnote-mark"><a href="https://www.blogger.com/null" id="fn7x0"> <sup class="textsuperscript">7</sup></a></span><span class="cmr-10">According to a recent translator of Fibonacci, a key feature of the techniques given in the </span><span class="cmti-10">Liber Abaci </span><span class="cmr-10">was</span>
<span class="cmr-10">that they enabled ideas to be transmitted and improved upon [</span><a href="https://www.blogger.com/FaM2.html#XLA"><span class="cmr-10">7</span></a><span class="cmr-10">, Introduction].</span></div>
</div>
<div class="footnote-text">
<!--l. 90--><br />
<div class="indent">
<span class="footnote-mark"><a href="https://www.blogger.com/null" id="fn8x0"> <sup class="textsuperscript">8</sup></a></span><span class="cmr-10">An I.M.F. paper on the crisis, </span><span class="cmti-10">Resolution of Banking Crises: The Good the Bad and the Ugly</span>
<span class="cmr-10">(WP/10/146) reveals that countries with a significant proportion of not for profit mutual banks (e.g. Germany,</span>
<span class="cmr-10">France, Italy) did not require the public bailouts needed in the U.K. and U.S. finance is not necessarily</span>
<span class="cmr-10">capitalist.</span></div>
</div>
<div class="footnote-text">
<!--l. 90--><br />
<div class="indent">
<span class="footnote-mark"><a href="https://www.blogger.com/null" id="fn9x0"> <sup class="textsuperscript">9</sup></a></span><span class="cmr-10">Poincar</span><span class="cmr-10">és approach is captured in his observation these two propositions the earth turns round, and it</span>
<span class="cmr-10">is more convenient to suppose that the earth turns round, have one and the same meaning [</span><a href="https://www.blogger.com/FaM2.html#XP_SH"><span class="cmr-10">24</span></a><span class="cmr-10">, p</span>
<span class="cmr-10">91].</span></div>
</div>
<div class="indent">
<br /></div>
<div class="indent">
<br /></div>
<h3 class="likesectionHead">
<a href="https://www.blogger.com/null" id="x1-1000"></a>References</h3>
<!--l. 97--><br />
<div class="noindent">
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<span class="cmti-12">and Stochastics</span>, 5(1):3-32, 2001.
</div>
<div class="bibitem">
<span class="biblabel">
<a href="https://www.blogger.com/null" id="XT_FG"></a>[31] <span class="bibsp"> </span></span>G. Tett. <span class="cmti-12">Fools' Gold</span>. Little Brown, 2009.</div>
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Tim Johnsonhttp://www.blogger.com/profile/06952723922503939504noreply@blogger.com0tag:blogger.com,1999:blog-3046071861494986299.post-12779520073024509212015-06-03T05:14:00.000-07:002015-06-03T06:09:36.622-07:00Mathiness: not just a problem of macro-economicsI was aware of the "mathiness" discussion <a href="http://paulromer.net/mathiness/">initiated</a> by the macro-economist Paul Romer, but have only recently read the articles because while the discussion was taking place I was finishing of an article for <i><a href="http://link.springer.com/journal/283">The Mathematical Intelligencer</a></i> that presents a remarkably similar argument (noting that mathematicians consider a coffee cup and doughnut to be the <a href="http://en.wikipedia.org/wiki/Torus">same</a>).<br />
<br />
<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"></a>Romer's concern is in the field of economic growth - an area I am unfamiliar with - but two related statements caught my attention<br />
<blockquote class="tr_bq">
<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"></a>For the last two decades, growth theory has
made no scientific progress toward a consensus.
... The question posed here is why the
methods of science have failed to resolve the
disagreement between these two groups.</blockquote>
and, postulating on why science has failed to come to a consensus, Romer offers an explanation as "mathiness"<br />
<blockquote class="tr_bq">
Like mathematical theory, mathiness
uses a mixture of words and symbols, but
instead of making tight links, it leaves ample
room for slippage between statements in natural
versus formal language and between statements
with theoretical as opposed to empirical
content.</blockquote>
My article for the <i>Intelligencer</i> is titled "Finance and Mathematics: where is the ethical malaise" and was written in response to a series of articles about the role of mathematics in financial crises. I begin my piece<br />
<blockquote class="tr_bq">
<blockquote class="tr_bq">
Discussions of the role of mathematics in finance appearing in <i>The Mathematical Intelligencer</i> can be split into two classes. <a href="http://link.springer.com/article/10.1007/s00283-010-9148-5">Marc Rogalski</a> and <a href="http://link.springer.com/article/10.1007/s00283-011-9210-y">Jonathan Korman</a> capture a widespread fury at a collapse in commercial ethics while <a href="http://link.springer.com/article/10.1007/s00283-010-9156-5">Ivar Ekeland</a> and <a href="http://link.springer.com/article/10.1007/s00283-011-9273-9">Peter Haggstrom</a> off er economic facts. The conclusions of Rogalski and Korman can be summarised as that mathematicians should spurn the financial world; Haggstrom and Ekeland point to technocratic solutions, characterised by better regulation. I do not buy into the argument that the problems of finance can be solved by regulations, it is, as both the U.K. and U.S. governments have identified, an ethical problem.</blockquote>
</blockquote>
I go onto to explain that mathematics has not been neutral in recent financial crises<br />
<blockquote class="tr_bq">
In their submission to the Parliamentary Commission on Banking Standards in 2013 the Bank of England was highly critical of how some fi rms have used advanced mathematical techniques to 'pull the wool' over the eyes of the regulator [<a href="http://www.publications.parliament.uk/pa/jt201314/jtselect/jtpcbs/27/27ii05.htm#a13">para. 89</a>] while U.S. authorities identified that this type of mathematical sleight of hand played a part in the 'London whale' episode [<a href="http://www.hsgac.senate.gov/download/report-jpmorgan-chase-whale-trades-a-case-history-of-derivatives-risks-and-abuses-march-15-2013">p 14</a>]. The existence of the Gaussian copula as a 'truth-teller' of the value of complex debt portfolios played a central role in the Crisis of 2007-2009, justifying the actions of banks, despite its short-comings being known to mathematicians. In the early 1970s, the Black-Scholes-Merton framework played an important part in legitimising the re-emergence of financial derivatives markets. As long ago as 1877 a large, corporate, insurer defended their actions in undermining fraternal/mutual insurers to legislators with the argument that</blockquote>
<blockquote class="tr_bq">
"There are certain fundamental rules . . . which can only be understood by actuaries, and it is impossible for me to go into here [<a href="http://www.hup.harvard.edu/catalog.php?isbn=9780674047488">p 198</a>]"</blockquote>
In my piece, for the mathematics community, I note that while mathematicians might see these abuses, which I am fairly certain could be ascribed to 'mathiness' as coined by Romer, as being abuses of mathematics, we do bear some responsibility.<br />
<a href="https://www.blogger.com/blogger.g?blogID=3046071861494986299" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"></a><br />
Many mathematicians, but probably only a minority, argue that there is an issue with mathematics in that it is often used to obscure rather than enlighten. Part of this trope is the presentation of mathematics as a mystical key that can unlock hidden truths:<br />
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In economics, my favourite example is Samuelson's account of how he 'discovered' Bachelier's thesis, much as Indiana Jones might uncover a magical artefact<br />
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<iframe allowfullscreen='allowfullscreen' webkitallowfullscreen='webkitallowfullscreen' mozallowfullscreen='mozallowfullscreen' width='320' height='266' src='https://www.blogger.com/video.g?token=AD6v5dy9sXp8ISMPKwr5btiVWRv6UcvAE78H_L1PMLbf5ZKiVdk7Rr1WUCV1_ZHSHVgq2s89YUsBCCy9zJPIWUugUA' class='b-hbp-video b-uploaded' frameborder='0'></iframe></div>
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(From the BBC programme "<a href="http://www.bbc.co.uk/science/horizon/1999/midas%20script.shtml" rel="nofollow">The Midas Formula/The Trillion dollar Bet</a>")</div>
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<br />
This all might seem benign in to context of encouraging people to engage with mathematics, but when combined with he dominant philosophical paradigm of <a href="http://en.wikipedia.org/wiki/Foundationalism">Foundationalism</a> and finance, problems emerge. <br />
<br />
Foundationalism sees language as being made up of statements that are either true or false and complex statements are valid if they can be deduced from true primitive statements. This approach is exemplified in the standard mathematical technique of axiom-theorem-proof and so arguments presented mathematically are automatically imbued with the quality of 'truth' and so hold authority.<br />
<br />
I then give a Habermasian explanation of what happens when mathematics and finance come together. <br />
<blockquote class="tr_bq">
<blockquote class="tr_bq">
the Enlightenment led to the objectification of nature and its mathematisation, which in turn leads to 'instrumental mindsets' that look to optimally achieve predetermined ends in the context of an underlying need to control external events. Where as during the seventeenth and eighteenth centuries public spaces emerged, the public sphere, which facilitated rational discussion that sought the truth in support of the public good, through the nineteenth century, mass circulation mechanisms came to dominate the public sphere and these were controlled by private interests. As a consequence, the public became consumers of information rather than creators of a consensus through engagement with information.</blockquote>
</blockquote>
Habermas, and Pragmatic philosophy more generally, offer an antidote by switching the emphasis of what language says (whether it is true or false) to what it does<br />
<blockquote class="tr_bq">
Specifically, the function of language is to enable different people to come to a shared understanding and achieve a consensus, this is de fined as discourse. Because discourse is based on making a claim, the claim being challenged and then justified, to be successful discourse needs to be governed by rules, or norms. The most basic rules are logical and semantic, on top of these are norms governing procedure, such as sincerity, and finally there are norms to ensure that discourse is not subject to coercion or skewed by inequality.</blockquote>
This is the basis of my claim that <a href="http://link.springer.com/article/10.1007%2Fs10551-014-2257-x">Reciprocity is a Foundation of Financial Economics</a>.<br />
<br />
With regard to the 'mathiness' discussion it is interesting to see that Romer argues the issues are in the collapse of '<a href="http://paulromer.net/protecting-the-norms-of-science-in-economics/">economic norms</a>', so are diagnosis and treatment appear aligned. My criticism of Romer is mild, and it is that he has not presented his case in the context of Pragmatism, which would provide him with a firmer foundation for his case (I recommend <a href="http://www.prometheusbooks.com/index.php?main_page=product_info&products_id=705">Haack</a> and <a href="http://www.tandf.net/books/details/9780415140362/">Misak</a> as bedrocks). <br />
<br />
However, I do not see my contribution as calming the criticism there has been for Romer, because my suggestion is the issue is not with one, or another, local mis-understanding but a fundamental issue with the dominant pardigm supporting science. Economists might disagree on their growth models but they are likely to agree that science is based on Foundationalism. This said, the problems Romer, and I, identify are pervasive, with science being unable to resolve many problems ranging from finance to climate change. <br />
<br />Tim Johnsonhttp://www.blogger.com/profile/06952723922503939504noreply@blogger.com1tag:blogger.com,1999:blog-3046071861494986299.post-3590223624315827912015-01-29T02:44:00.001-08:002015-01-29T14:38:10.811-08:00A moral case for bank money<div>
<span style="font-family: inherit;">Finance is a skeleton that supports the development of a healthy society, not a utility that plumbs the economy together. The justification for this observation is historical. Richard Seaford has <a href="http://www.cambridge.org/us/academic/subjects/classical-studies/classical-studies-general/money-and-early-greek-mind-homer-philosophy-tragedy"><span style="color: #1155cc;"><u>argued</u></span></a> that the culture that emerged in Greece some two and a half thousand years ago, creating a unique approach to science and democratic politics, was a consequence of a peculiar Greek invention; money, a token that signifies trust between citizens. The flowering of European culture, and the genesis of modern science, in thirteenth century Europe followed, and some <a href="http://www.sunypress.edu/p-1888-on-the-shoulders-of-merchants.aspx"><span style="color: #1155cc;"><u>argue</u></span></a> was a consequence of, a period of rapid monetisation of society that initiated the end of feudalism. Similarly, western Europe’s development accelerated ahead of the rest of the world in the seventeenth century powered by financial innovations in the Netherlands and Britain.</span></div>
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<span style="font-family: inherit;">Charles Mackay in his classic <a href="http://en.wikipedia.org/wiki/Extraordinary_Popular_Delusions_and_the_Madness_of_Crowds"><span style="color: #1155cc;"><u>comparison</u></span></a> of England’s South Sea Bubble and France’s, almost simultaneous, Mississippi Bubble, emphasises the different reactions in France and Britain to the credit bubbles. In the aftermath of the crises, the French inhibited the development of private banks but maintained the autocratic political system, whereas the British reformed the <a href="http://en.wikipedia.org/wiki/Robert_Walpole"><span style="color: #1155cc;"><u>political system</u></span></a> and enabled the development of finance. The results of Britain’s Financial Revolution were Agricultural and Industrial Revolutions along with the eclipse of France as a global power. For France, dependent on taxation to fund the state, there was the ultimate collapse of the political system in bloody revolution.</span></div>
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<span style="font-family: inherit;">Getting the structure of our financial system right is not a trivial matter.</span><br />
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One argument gaining support is that the root of recent problems in finance is the private creation of money by banks, and so the solution is to <a href="http://www.respublica.org.uk/item/Money-Creation-and-Society-The-beginning-of-the-debate-on-how-money-is-created-"><span style="color: #1155cc;"><u>strip banks of this ability</u></span></a>. What this would entail is not clear but a core theme is that transactions would involve minted cash (physical or electronic), not bank money. We can visualise the practical consequence of this in little brown envelopes on pay-day containing coins and Bank of England notes. No bank transfers, certainly not in the foreseeable future, meaning no debit cards at the supermarket checkout and the replacement of cyber-crime by good old-fashioned robbery. <span style="background-color: white;">This makes concrete part of the problem Martin Wolf <a href="http://www.ft.com/cms/s/7f000b18-ca44-11e3-bb92-00144feabdc0.html">identifies</a> when he makes the observation that "The transition to a system in which money creation is separated from financial intermediation would be feasible, albeit complex</span><span style="background-color: white;">.</span><span style="background-color: white;">" It might prove impossible to get through the Christmas binge</span><span style="background-color: white;">, when there is widespread short-term demand for cash. Could a computer system cope with the funds transfers associated with <a href="http://www.bbc.co.uk/news/business-30672179">Black Fridays</a> and Cyber Mondays </span><span style="background-color: white;">without the ability to create money</span><span style="background-color: white;">? Banks, in this environment, would come to resemble peer-to-peer lending facilitators and the consequence would be that people</span><span style="background-color: white;"> who have wealth, or are connected to wealthy networks, could buy expensive things</span><span style="background-color: white;">, but for the majority it would be harder to get a mortgage. </span><span style="background-color: white;">While this might sound a bit draconian to the British, Germans still have a preference for cash and traditionally live in rented accommodation, having long connected debts (</span><i style="font-family: inherit;">schulden</i><span style="font-family: inherit;">) and guilt (</span><i style="font-family: inherit;">schuld</i><span style="font-family: inherit;">) and, after all, they have done well economically.</span></div>
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<span style="font-family: inherit;">Unfortunately it is not certain that German economic success rests on the German preference for cash. An equally plausible explanation is the structure of the German banking system, which, unlike the British and U.S. systems, is not dominated by private profit seeking banks but has a significant sector of <a href="http://en.wikipedia.org/wiki/German_public_bank"><span style="color: #1155cc;"><u>not-for-profit, regional, financial institutions</u></span></a>. An <a href="https://www.imf.org/external/pubs/cat/longres.cfm?sk=23971.0"><span style="color: #1155cc;"><u>IMF paper</u></span></a> highlights how countries with this type of financial system, including France and Spain, did not require the massive government bailouts that British and U.S. banks did in 2008-2009. Mutuals and public banks create money in the same way as privately owned banks and so preventing banks from creating money seems to be a rather extreme solution when the problem might be elsewhere.</span></div>
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<span style="font-family: inherit;">Calls to prevent banks from creating money to ensure financial stability resemble calls to ban the internal combustion engine to prevent climate change. It would clearly go a long way to solving the problem, in theory, but is totally impractical. One group who would like to see the debate on banking reform focus in on money creation are the banks themselves, because they can be confident that if this is where the debate is centred, nothing will change. Most voters need bank credit just as they need cars.</span></div>
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<span style="font-family: inherit;">I cannot offer a straightforward alternative to preventing banks, or anyone else, making money. I do have an alternative idea of where the problem lies though. If you read about eighteenth century finance it is striking how engaged people were with financial innovations. Well before the South Sea Bubble Daniel Defoe <a href="http://www.pickeringchatto.com/titles/1013-defoes-review-1704-13"><span style="color: #1155cc;"><u>wrote</u></span></a> about the problem of banking</span></div>
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<span style="font-family: inherit;">Money has a younger sister, a very useful and officious Servant in Trade ... Her name in our Language is call'd CREDIT…<span style="color: maroon;"> </span>This is a coy Lass <span style="color: maroon;">...</span> a most necessary, useful, industrious creature: <span style="color: maroon;">...</span> [and] a World of Good People lose her Favour, before they well know her Name; others are courting her all their days to no purpose and can never come into her books. If once she is disoblig'd, she's the most difficult to be Friends again with us … for as once to want her, is entirely to lose her; so once to be free from Need of her, is absolutely to posses her.</span></div>
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<span style="font-family: inherit;">Lady Credit was seen as a coy mistress, much as Boethius had <a href="https://books.google.co.uk/books?id=yPhLUdeowlwC&lpg=PP1&dq=consolations%20of%20philosophy&pg=PA25#v=onepage&q&f=false"><span style="color: #1155cc;"><u>perceived</u></span></a> <i>Fortuna</i></span></div>
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<span style="font-family: inherit;">I know how Fortune is ever most friendly and alluring to those whom she strives to deceive, until she overwhelms them with grief beyond bearing, by deserting them when least expected</span></div>
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<span style="font-family: inherit;">Right up until the mid twentieth century credit was represented in this way, with <a href="http://en.wikipedia.org/wiki/John_Strachey_(politician)"><span style="color: #1155cc;"><u>John Strachey</u></span></a> writing</span></div>
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<span style="font-family: inherit;">The banks are essentially feminine institutions. They create the new money which sets the wheels of production turning again. But they cannot procreate without a spouse. The newly born money must have a father as well as a mother. Someone must take the active, positive role of borrowing, spending, and employing, or the banks will remain barren.</span></div>
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<span style="font-family: inherit;">In this conception commerce is a marriage between credit and opportunity with the objective of producing growth. However, Lady Credit is attractive and, as Defoe observed in 1709, sometimes her relations are not so benign</span></div>
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<span style="font-family: inherit;">The first Violence they committed was downright Rape ... these new-fashion'd thieves seiz'd upon her, took her Prisoner, toss'd her in a Blanket, ravish'd her, and in short us'd her barbarously, and had almost murther'd her</span></div>
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<span style="font-family: inherit;">If women run the risk of sexual assault, the civilised response is not to lock them away out of harm’s reach, but focus on the perpetrators. The problems of finance are not in creating money but in lending money to unsuitable projects.</span></div>
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<span style="font-family: inherit;">Through the nineteenth century science became confident that it had tamed <i>fortuna</i> and a consequence was the mechanisation of finance. Credit was no longer a prize to be wooed but a servant to be controlled. As finance became de-humanised the morality of the <a href="http://www.amazon.co.uk/Quakers-Money-Morals-James-Walvin/dp/0719557682"><span style="color: #1155cc;"><u>Quakers</u></span></a>, who established many of Britain's financial institutions, was replaced by the profit maximising principle. In the process, people have become alienated from finance and lost the capacity to make their own financial judgements; we need to employ professionals to plan our future.</span></div>
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<span style="font-family: inherit;">I have <a href="http://dx.doi.org/10.1007/s10551-014-2257-x"><span style="color: #1155cc;"><u>argued</u></span></a> that profit maximisation should not be at the heart of commerce, rather the norms (virtues, if you prefer) of reciprocity, sincerity and charity. In this framework mutual mechanisms, including peer-to-peer and crowdfunding, are as legitimate as profit maximising private banks. I believe the advantage of this approach is that it takes as given that the economy is capricious and beyond the control of wise men observing nature and pulling controls. Preventing banks from creating money reflects a desire to freeze the economy in order to stop it becoming chaotic. This is a forlorn hope, to which the collapse of Bretton-Woods is testimony.</span></div>
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<span style="font-family: inherit;">If you feel my claim that reciprocity, sincerity and charity should be, or even could be, at the heart of finance is as absurd as preventing banks creating money I would point you to Shakespeare’s <i>The Merchant of Venice</i>. One reading of the play is as a study of the four classical loves: friendship (<i>philia</i>), affection (<i>storge</i>), romantic (<i>eros</i>) and unconditional (<i>agape/caritas/</i>charity). Shakespeare personified charity in the form of Antonio, the Merchant of Venice; why did he do that?</span><br />
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<span style="font-family: inherit; line-height: 18.3999996185303px;">I wrote this piece, arguing against removing banks' ability to create money, for <i>Res Publica</i>'s Disraeli Room blog in response to a post </span><a href="http://www.respublica.org.uk/disraeli-room-post/2014/12/12/money-creation-society-beginning-debate-money-created/" style="font-family: inherit;">Money Creation and Society: The beginning of the debate on how money is created</a><span style="font-family: inherit;">. </span><br />
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<span style="font-family: inherit;">The case I present is not technical but moral, </span> in the sense of mores/<i>moeurs.</i><span style="font-family: inherit; line-height: 18.3999996185303px;"> I admire <a href="http://ftalphaville.ft.com/meet-the-team/izabella-kaminska/">Izabella Kaminska</a>'s <a href="http://ftalphaville.ft.com/2014/04/25/1836542/martin-wolf-on-funny-money-creation/">review</a> of the case to strip banks of their money creation powers, and </span><span style="font-family: inherit; line-height: 18.3999996185303px;">agree with her </span><a href="http://ftalphaville.ft.com/2014/04/25/1837512/on-the-elimination-of-privately-issued-money/" style="font-family: inherit; line-height: 18.3999996185303px;">analysis of the issues</a><span style="font-family: inherit;">, in particular I support the trilateral monetary system, based on sovereign, bank and private money, that she describes. Specifically, I like her comment that</span><br />
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A more prudent path [to stripping banks of their ability to create money]might just be encouraging both the central bank and the market to get better at identifying over or under issuance where and when it happens, something which could be made easier if private money’s price signal was detached from the state peg.</blockquote>
<span style="font-family: inherit;">This lays the foundation, in part, for presenting a moral case, I don't think the solution to credit bubbles lies in how finance is plumbed together, rather the ethical context under which finance is conducted</span><br />
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<span style="font-family: inherit;">A further motivation for presenting a moral case originated in my experience of the Scottish Independence </span>referendum<span style="font-family: inherit;">, particularly the </span><a href="http://www.bbc.co.uk/news/uk-scotland-scotland-politics-28929057" style="font-family: inherit; line-height: 18.3999996185303px;">dismal performance</a><span style="font-family: inherit;"> of Alistair Darling, leader of the unionist campaign, in the final TV debate with the leader of the nationalist campaign, Alex Salmond. A central issue in the campaign was the currency an independent Scotland would use, and Salmond advocated retaining the pound, controlled by the Bank of England. Darling, as a former Chancellor of the Exchequer had a deep understanding of the technical problems this presented, but Salmond, relying on the public's indifference to these problems and Darling's inability to articulate them, won the debate. </span><br />
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<span style="font-family: inherit;">A common irritant with the Independence Referendum debate was that both parties claimed a vote for them would change everything, but change nothing. It struck me that the case presented by Positive Money was similar; stripping the bank's of their ability to create money will end the boom and bust cycle, to the benefit of the public, without changing individuals' experience of banking. The recent Greek election, similarly, centred on the claim that the Greeks can re-negotiate their rescue package, to the benefit of the electorate, without the negative consequences of leaving the Eurozone. Personally I feel the chance of this turning to </span>tragedy<span style="font-family: inherit;"> or comedy are about equal, but the most likely outcome will be a yawn: the debt will be re-negotiated, the ECB having had five years to ring-fence the problem. However, in the context of discussions of bank money it is worth highlighting that the Greek bankruptcy was a consequence of Greek government mis-management, and the austerity was imposed by a troika of public institutions. Boom and bust is as likely to be caused by </span>public bodies<span style="font-family: inherit;"> as private banks.</span><br />
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<span style="font-family: inherit;">So, my aim in this piece was to side-step the complex technical problems and present a moral argument that might be more accessible to a general audience.</span><br />
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My piece survived on the <i>Res Pubica</i> blog for around two weeks and then was pulled at the request of Ben Dyson, the author of the original piece. Mr Dyson objected to two 'inaccuracies' in the piece. Since both relate to what might happen if banks are prevented from creating money, and given these are contingent events, I don't think they can, in fact, be described as inaccurate; we have differing opinions. I invited Mr Dyson to engage in public deliberation on the points, through the Disraeli Room blog, but his response was to persuade <i>Res Publica</i> to pull my piece. An interesting outcome given the claim that the original article was to be the the start of a debate. What follows, not perfect but an honest attempt to continue the debate, is my original piece. The points of contention were the following in the original,<br />
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<span style="text-align: justify;">No bank transfers, certainly not in the foreseeable future, meaning no debit cards at the supermarket checkout and the replacement of cyber-crime by good old-fashioned robbery.</span><span style="text-align: justify;"> </span><span style="background-color: white; text-align: justify;"> People who have wealth can buy expensive things, but for the majority it would be difficult to get a mortgage and impossible to use a credit card to get through the Christmas binge<span style="color: #38761d;">.</span></span><span style="background-color: white; text-align: justify;"> While this might sound a bit draconian to the British, Germans still have a preference for cash and live in rented accommodation, having long connected debts (</span><i style="font-family: inherit; text-align: justify;">schulden</i><span style="text-align: justify;">) and guilt (</span><i style="font-family: inherit; text-align: justify;">schuld</i><span style="text-align: justify;">) and, after all, they have done well economically.</span></blockquote>
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which has been clarified in this version.<br />
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Tim Johnsonhttp://www.blogger.com/profile/06952723922503939504noreply@blogger.com7tag:blogger.com,1999:blog-3046071861494986299.post-91222947855133474992014-12-04T08:03:00.002-08:002014-12-04T08:08:59.140-08:00Maths and morals, economics and greedThis piece has been posted on the <i><a href="http://respublica.org.uk/About-Us">Res Publica</a></i> think tank <a href="http://espublica.org.uk/item/Talking-to-bankers">Disraeli Room blog</a>.<br />
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I recently <a href="https://www.youtube.com/watch?v=D0tRSDQ2wAI#t=4716">asked a prominent mathematician</a> who once ran a hedge fund, Doyne Farmer, whether seeking to make a riskless profit was ethical. I don't think he understood the question. Mathematics has always been part of finance but with the re-introduction of derivatives markets in the 1970s and their growth in the nineties, ‘quants’, trained in engineering, physics and mathematics, came to dominate the ‘casino banking’ that is widely criticised. My concern is that the quants are not amenable to questions of morality, and so the problems of finance are going to be difficult to resolve without finding the right way of communicating with the bankers who see themselves as scientists.<br />
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I am a mathematician who works on financial problems who became interested in the role of mathematics in the financial crises since 2006. Initially my focus was on explaining why mathematics is so critical to modern banking in response to, for example, the FSA's misplaced assessment, in the <a href="http://www.fsa.gov.uk/pubs/other/turner_review.pdf">Turner Review</a>, that there had been an over-reliance on sophisticated mathematics in the lead up to the crisis (the techniques they discussed were simplistic and not part of mathematics). Subsequent, more authoritative, reviews such as the US <a href="http://fcic.law.stanford.edu/">Financial Crisis Inquiry Commission </a>and the <a href="http://www.parliament.uk/bankingstandards">Parliamentary Commission on Banking Standards</a> removed mathematics from centre stage and replaced it with ethics.<br />
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At first sight this re-direction of blame was a relief, but I soon realised it raises a concern: if the problem of finance is one of ethics, what role does mathematics have in its solution? The immediate response is none, but the concern is that if we believe that maths, physics and engineering are concerned with what is, and have nothing to say about what ought to be, we will struggle to convince people trained in the scientific tradition to take commercial corporate morality seriously. The Chartered Institute of Bankers are working on <a href="http://www.cbpsb.org/">Professional Standards</a> but are struggling to engage with the quants, who operate the casino branch of banking, because the quants believe science is value neutral; it delivers truths beyond morality.<br />
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<a href="http://www.respublica.org.uk/item/Regulating-Banks-VS-Regulating-Bankers">Arguing</a> that ethos and purpose should be placed at the heart of finance misses the point that there is an ethos and purpose at the heart of modern finance. The ethos is based on consequential morality: that an individual seeking a profit has consequential societal benefit, and excesses can be restrained by well-crafted rules. This results in the purpose of finance being any profit within the letter of the law. This ethos presupposes, firstly, that it is possible to calculate consequences and secondly, that restraining regulations can be well crafted. It is a very scientific ethos whose origins can be traced back to Descartes, and comes to us via the British empiricists, Hume and J. S. Mill. It is the ethos that has led to the contemporary study of economics imbuing the student with <a href="http://t.co/RbPmnfFfMi">greed</a>. Many quants would regard the doctrine as being comparable to Darwinian evolution and the Big Bang Theory. This brings to mind Alasdair MacIntyre's ‘disquieting suggestion’ that modern society has completely lost the ability to make moral judgements and I see it as the brick wall that most attempts to reform banking will crash into.<br />
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I believe the brick wall can be dismantled relatively easily: by recognising that many of the practices of contemporary finance associated with ‘casino banking’ were widespread before the eighteenth century. Unlike today, they were undertaken in the context not of consequentialist or deontological ethics, but of virtue ethics that focuses on good practice. It might seem surprising that I suggest this is a relatively easy approach. What make it easy is that rather than criticising modern finance on the basis that it is degraded from a mythic golden age of finance, the starting point is the <i><a href="http://magic-maths-money.blogspot.co.uk/2013/08/what-doux-commerce-means-to-me.html">doux-commerce</a></i> thesis that finance is civilising. Rather than characterising bankers as amoral spivs, they are presented as paragons of rational morality and the approach gives the bankers the opportunity to carry on their activities while, critically, reconstructing their own ethos. I developed this representation in my paper <i><a href="http://dx.doi.org/10.1007/s10551-014-2257-x">Reciprocity as a Foundation of Financial Economics</a></i>.<br />
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The hurdle this approach needs to cross is that of the dominant ideologies of markets. The market ideology holds that the market mechanism will deliver optimal solutions to society, while anti-market ideology argues that profits are degrading and markets are destructive. The hurdle can be crossed by ignoring both these ideologies and analysing the role that money and markets have played in forming both Western science and democracy. We need to represent markets as centres of communication and deliberation, not as competitive arenas driven by profit maximisation. The clue is in the word forum, which defined both the market place and the political centre of a Roman city.
Tim Johnsonhttp://www.blogger.com/profile/06952723922503939504noreply@blogger.com4tag:blogger.com,1999:blog-3046071861494986299.post-12895683910029209702014-09-17T06:47:00.000-07:002014-09-17T12:15:50.671-07:00Hyperbolic (or Simple) DiscountingI was critical of Doyne Farmer in my previous post, and in response I got a message from someone I respect<br />
<blockquote class="tr_bq">
But I like Farmer's work... solar costs follow Moore's law; and we should value future more (hyperbolic discount rates).</blockquote>
What struck me is that there is an incongruity in associating Moore's Law and Hyperbolic discounting, which I shall explain, and when combined with the first statement points to something more peculiar: do ideas now derive their legitimacy from individuals rather than in relation to each other?<br />
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The Moore's Law statement is easier to explain and I assume it comes from this <a href="http://www.plosone.org/article/info%3Adoi%2F10.1371%2Fjournal.pone.0052669" target="_blank">paper</a> (a nice summary was published in <a href="http://www.forbes.com/sites/jimhandy/2013/03/25/moores-law-vs-wrights-law/" target="_blank">Forbes</a>) that investigates the theories<br />
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that cost [of production] decreases as a power law of cumulative production [Wright's Law]. An alternative hypothesis is Moore's law, which can be generalized to say that technologies improve exponentially with time.</blockquote>
and that<br />
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Our results show that technological progress is forecastable, with the square root of the logarithmic error growing linearly with the forecasting horizon at a typical rate of 2.5% per year. </blockquote>
I think this final statement exemplifies the gulf between Farmer and myself: he presents technological growth as a matter of (statistical) fact, I see it as one of commercial values (the argument is presented by Deirdre McCloskey, particularly in <a href="http://press.uchicago.edu/ucp/books/book/chicago/B/bo9419313.html" target="_blank">Bourgeois Dignity</a>). But this post is not about that.
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I suspect the reference to hyperbolic discounting is related to this <a href="http://cowles.econ.yale.edu/P/cd/d17a/d1719.pdf" target="_blank">paper</a>. Before commenting on Farmer's specific paper I would like to make some comment on the idea of hyperbolic discounting in general. A hyperbolic discount factor is usually described as follows<br />
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<dd><img alt="f_H(D)=\frac{1}{1+rT}\," class="mwe-math-fallback-png-inline tex" src="//upload.wikimedia.org/math/2/4/5/24533ce6d82a20a170362d4b0f6240c9.png" /></dd><br />
where <i>k</i> is the rate of discounting and <i>D</i> is the maturity (I apologise for the notation I am lifting equation .png from elsewhere to save time). They are contrasted with exponential discounting factors<br />
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<dd><img alt="f_E(D)=e^{-kD}\," class="mwe-math-fallback-png-inline tex" src="//upload.wikimedia.org/math/4/9/e/49e9006965a48d27e78f32be0e438edb.png" />.</dd>The statement the hyperbolic discounting implies valuing the future more is a bit naive. If we fix <i>k </i>then the decline in the exponential discount factor is faster than decline in the hyperbolic discount factor, but this assumes the <i>k</i> in both equations have equivalent meaning, which is not the case - and my undergraduate actuarial students get annoyed with me when suggest (in the context of discrete time derivative pricing) they are. If we do not assume the rates are the same, we can see we can choose a rate for the exponential that gives the same discount factor as the hyperbolic:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjpWr5apO2rFcKO8g2r9o_vqj_JvTSxPKe7yrK7n9gttG4iCa1MrL8Vd7UmrNspKjPvqlc7PrhkAW8gSxzpTlMqPIMw4DZLMfOcU8KT9B7FQgeTVuhnrCnyuHqdPzjzlgtjhMEwu113hDQ/s1600/discounting.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjpWr5apO2rFcKO8g2r9o_vqj_JvTSxPKe7yrK7n9gttG4iCa1MrL8Vd7UmrNspKjPvqlc7PrhkAW8gSxzpTlMqPIMw4DZLMfOcU8KT9B7FQgeTVuhnrCnyuHqdPzjzlgtjhMEwu113hDQ/s1600/discounting.png" height="481" width="640" /></a></div>
Exponential discounting does not imply, <i>a priori</i>, that the future is valued less, the discount rate , <i>k</i>, determines how we value the future. <br />
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Farmer points out that hyperbolic functions decrease at a lower rate than exponential functions and so in the limit as time approaches infinity, hyperbolic functions will always value the future more than exponential discounting. Farmer goes on to suggest that in certain cases of hyperbolic discounting "there is an infinite weight on the far future", this is problematic as if decision making placed infinite weight on the far future we would never consume now, but would have resources available at the end of time when the universe dies. More technically, these discount functions would contravene the '<a href="http://www.dictionaryofeconomics.com/article?id=pde2008_T000218" target="_blank">transversality condition</a>', which <a href="http://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/dp180.pdf" target="_blank">originates in classical mechanics</a>.<br />
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Classically in finance, a <a href="http://en.wikipedia.org/wiki/Discounting#Discount_factor" target="_blank">discount factor</a> is given in terms of hyperbolic discount factor and one uses a <i>D</i>-specific value for <i>k</i>, obtained from the <a href="http://en.wikipedia.org/wiki/Yield_curve" target="_blank">yield-curve</a>. This gets to the heart of the difference between exponential and hyperbolic discounting; in exponential discounting it is usually assumed that the rate <i>k</i> is constant, and the discounting is time-consistent, where as in hyperbolic discounting the rate <i>k</i> is time-dependent. This is why the exponential discount function is deemed not to fit Thaler's empirical data, because it is assumed <i>k</i> is fixed, independent of <i>D</i>. <br />
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However, it should be noted that the whole field of interest rate models in mathematical finance is concerned with relating the exponential discount rate to the yield curve in order to identify the right discount factor, and in such models it is (generally) assumed that the exponential discount rate is time dependent, and usually stochastic.<br />
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To me the discussion of hyperbolic discounting is symptomatic of much of behavioural finance, in that it introduces a sophisticated term into finance for something that has been understood for some time. My first reaction to hyperbolic discounting was "isn't this just simple (as distinct from compound) discounting", this is a naive but none the less not an unreasonable first approximation. I dislike the adoption of the difficult term "hyperbolic" to re-package the idea that the yield-curve observed in experiments is (peculiarly) decreasing (in itself not a trivial concept) as I see it as "mystifying" finance. I often associate this process with claims that financial theory is novel. For example Farmer asserts that exponential discounting was "originally posited by Samuelson (1937) and put on an axiomatic foundation by Koopmans (1960)." It might come as both a surprise, and a disappointment, to Prof Farmer to learn that the number "<i>e</i>" was first identified by James Bernoulli in 1683,a few years before Newton's <i>Principia</i>, by considering how a bank account grew as the time between interest payments became infinitesimally small, a year later Leibnitz tackled the problem in the abstract and arrived at the same answer. In fact, the problem of <a href="http://en.wikipedia.org/wiki/Brachistochrone_curve" target="_blank">Brachistochrone curve</a>, a key step in the development of dynamics, makes a related connection between Bernoulli, Leibnitz, Newton and the transversality condition mentioned above.<br />
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The issue I have with hyperbolic discounting is similar to the issue I have with"<a href="http://en.wikipedia.org/wiki/Prospect_theory" target="_blank">Prospect Theory</a>"; a key insight of which is that utility functions are S-shaped, this was observed by Friedman and Savage in their 1948 paper <a href="http://www.jstor.org/discover/10.2307/1826045?uid=2&uid=4&sid=21104177132301" style="font-style: italic;" target="_blank">The Utility Analysis of Choices Involving Risk</a> (Kahneman and Tversky's paper of 1979, <i><a href="http://www.jstor.org/discover/10.2307/1914185?uid=2&uid=4&sid=21104177132301" target="_blank">Prospect Theory: An Analysis of Decision Under Risk</a></i>, has 10 times the citations as Friedman and Savage). I wonder if this is a reflection of the higher status of the natural sciences over the social sciences: when an economist and a statistician make the observation, it is ignored (partially because it makes the optimisation problem hard), if psychologists make similar observations, admittedly armed with experimental data, it is taken seriously. I have already discussed similar issues I have with "<a href="http://magic-maths-money.blogspot.co.uk/2013/03/the-perils-of-physics-imperialism.html" target="_blank">physics imperialism</a>". There is also the assumption that because when people are presented with the choices in the experiment choose to value future payoffs peculiarly highly, this is in some way "correct". Mathematics has a long history of debunking "common sense" because it requires careful thinking. It is peculiar to value distant payoffs more highly because there is the chance that you die waiting (the experiments usually involve cash payoffs to participants, not public goods).<br />
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What perplexes me is that, on the one hand Moore's Law, and the exponential growth of technology, is perceived as reasonable, where as on the other, exponential growth of the much simpler process of money in a bank account, is perceived as unreasonable. Now some might argue that I miss the essential nature of hyperbolic discounting in associating it with interest accrual, but I would claim this is the <a href="http://magic-maths-money.blogspot.com/2014/06/reciprocity-and-difference-between.html" target="_blank">essential point</a>. <br />
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Financial "behaviour" is that interest is compounded, not simple, and so when discounting I suggest it is more coherent to employ exponential discounting with a non-constant discount rate than try and fit a constant hyperbolic discount rate. I think this is a preferable approach because it emphasises the dynamic (and contingent) nature of discounting, rather than arguing about the "true" model and its seeking its "true" parameters.<br />
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Basically I see the role of academics as making things coherent, identifying the relationship between ideas. I feel this places me outside the norm, where academic success seems to be measured by coming up with new ideas, even if not new and however problematic they are. What I find worrying is that there appears to be an emergence of a "cult of personality" in science, where by people express an allegiance to an individual who personifies correct thinking, rather than autonomously challenging authority. Maybe that's just because I have been too close to the Scottish independence referendum campaign recently and am a bit jaded by it all.Tim Johnsonhttp://www.blogger.com/profile/06952723922503939504noreply@blogger.com4tag:blogger.com,1999:blog-3046071861494986299.post-10540537911881364472014-09-12T01:02:00.000-07:002014-09-17T06:28:28.129-07:00Economics, Ecology and EthicsI spent the first part of the week at the <a href="http://www.systemicrisk.ac.uk/events/eco2-exploring-fundamental-links-between-ecology-and-economics" target="_blank">eco**2 meeting</a>, sponsored by the British Ecological Society and the LSE's Systemic Risk Centre and exploring the relationship between economics and ecology. I attended because I am in the early stages of a research programme to explore if distinctive financial network topologies emerge out of different commercial cultures, and whether the distinctive topologies are more/less efficient in distributing funds and resilient (robust) in responding to shocks; essentially how financial systems evolve and how the commercial environment influences the financial organisms- the ecology. It was useful as I met for the first time Thomas Lux and Steffano Battiston.<br />
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I have a strange connection with ecologists; before becoming an academic I worked for a US oil company in London. In the late 1990s, in response to over a decade of failed exploration, the firm invited <a href="http://www.jesus.ox.ac.uk/fellows-and-staff/fellows/lord-krebs" target="_blank">John Krebs</a> and <a href="http://www.zoo.ox.ac.uk/people/view/kacelnik_a.htm" target="_blank">Alex Kacelnik</a> to review its approach to exploration based on their experience of optimal foraging strategies of animals. I was the internal project manager. The research was cancelled before the project finished (part of a change in senior staff and a "re-focus") and the two tangible consequences are <a href="http://www.oxfordrisk.com/" target="_blank">Oxford Risk</a> and that I list Alex as one of my inspirations to leave industry for academia (along with a choice between a nice redundancy package and PhD in maths or a career in Houston).<br />
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One thing that Alex taught me is the sub-optimality of risk-aversion. Some birds need to eat up to 40% of their body weight in a British winter to survive the night, and so their very existence depends on making the right decisions about looking for food. Let's say a bird has 6 hours to find 9 berries and it has two choices:<br />
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<li>[Play it Safe] The bird stays where it is, where it knows there are berries in the hope of finding a few. The chance of finding one or two berries in the hour is 50:50.</li>
<li>[Take a Risk] The bird flies off, in the hope of finding berry-bonanza but with a high chance of only finding enough to replace the energy lost in flying. The energy cost of flying is one berry and the chance of only finding the one berry in the new field is 5 in 6, but there is a 1 in 6 chance of finding 10 worms (and getting an excess of 9).</li>
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Notice that the expectation of both strategies is the same, one-and-a-half berries in an hour and so the bird can expect to get the nine berries in the six hours. However the second approach is riskier (for any concave utility function the expected utility of the second strategy is less than the first).<br />
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Alex explained that if the bird has only found five berries after five hours, it is certain to die if it does not switch to the risky strategy, where it has a small chance of finding the 10 berries that will ensure survival. A similar argument applies if the bird has found more than 8 berries after 5 hours - it can afford to take a risk.<br />
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The financial interpretation is that only the middle class should be risk averse the rich can afford to gamble, the poor have nothing (substantially) to lose by gambling but there is the small chance they become rich. This is an explanation as to why the poor defy economic 'rationality' in buying lottery tickets, it is actually practically reasonable. <br />
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Apart from presenting my own work, my first contribution came in the second plenary when Thomas Lux and Michel Loreau discussed "Important Models in Economics/Ecology". Michel discussed<a href="http://en.wikipedia.org/wiki/Malthusian_catastrophe" target="_blank"> Malthusian catastrophe</a>s (possibly in response to a question) and positively contrasted Malthus with <a href="http://en.wikipedia.org/wiki/Marquis_de_Condorcet" target="_blank">Condorcet</a>. This becomes interesting to me, given <a href="http://magic-maths-money.blogspot.co.uk/2013/12/the-rational-man-average-man-and.html" target="_blank">Condorcet is associated with maths and finance</a>. The moderator asked the audience of mixed "economists" and ecologists if any economist took Malthus seriously, I don't think anyone raised their hand. I felt this left the ecologists with the impression that economists were a bit short sighted. My contribution was the following: Malthus was a Tory cleric worried about the effects of the political changes -the collapse in social hierarchy- in France, where as Condorcet was committed to French Revolutionary principles of equality, brotherhood and freedom. I suggested the reticence of economists to follow Malthus was that his ideas legitimated the liberal policies of the British government during the Irish famine. Restricting growth on the basis of Malthus requires we address the problem of (global) inequality; I question the morality of people with stuff telling people without stuff that they can't have any more stuff. Lord May commented that Malthus was right but the time scale was wrong, I think this is a peculiar view of an empirical scientist: I can point to the problems of the Malthusian catastrophe theory, the theory has yet to be shown to be true. I think the consensus is that famine and pestilence is not an issue of availability of resources but the distribution of resources, what I think economists call the co-ordination problem.<br />
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At the end of the day Doyne Farmer captivated his audience by describing his success as a hedge fund quant in the 1990s. I though it a bit odd that the previous evening Lord May had been critical of the type of activities Doyne had been involved with, yet 24 hours later the audience seemed to see the sense of it all. Doyne's story was essentially that he did not believe in the Efficient Markets Hypothesis, and as a skilled mathematician he could go below the economic theory of "first order efficiency" and mine <i>riskless</i> profits in identifying "second order inefficiency". He produced a series of convincing plots, which all seemed to end around <a href="http://en.wikipedia.org/wiki/Long-Term_Capital_Management#1998_bailout" target="_blank">1998</a>. Let's be straight- <i>a priori</i> I am sceptical about Farmer's claims given he <a href="http://tuvalu.santafe.edu/~jdf/About%20Me.html" target="_blank">claims he built the first wearable computer in the 1970s</a>, where as I believe it was <a href="http://ieeexplore.ieee.org/xpl/articleDetails.jsp?arnumber=729523&sortType%3Dasc_p_Sequence%26filter%3DAND%28p_IS_Number%3A15725%29" target="_blank">Claude Shannon and Ed Thorpe in the early 1960s</a>. At the end of his presentation a young ecologist asked the question "If you were making money out of these inefficiencies, who was losing money". Farmer skirted round the question, first stating that economics is not a zero-sum game (that is true, but finance IS a zero-sum game) and that the activities of arbitrageurs made markets more efficient (again that is true). What he did not answer was who was losing money. <br />
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I then asked Prof Farmer "Is making riskless profits ethical?" My reasons were three-fold.<br />
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<li>I felt he had not been sincere in answering the ecologist's question.</li>
<li><a href="http://link.springer.com/article/10.1007%2Fs10551-014-2257-x" target="_blank">I have argued</a> that the Efficient Markets Hypothesis can bee seen not a statement of fact but one of values: it is a contemporary version of the Scholastic injunction on making riskless profits. Farmer's criticism of the EMH, in my mind, is a criticism of this moral injunction.</li>
<li>Both the US and UK legislators (in the <a href="http://fcic.law.stanford.edu/report" target="_blank">Financial Crisis Inquiry Commission</a> report of 2011 and the <a href="http://www.parliament.uk/business/committees/committees-a-z/joint-select/professional-standards-in-the-banking-industry/news/changing-banking-for-good-report/" target="_blank">Changing Banking for Good</a> report of 2013) stress the degradation of commercial ethics as a cause of financial crises since 2007.</li>
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I do not think I am alone in thinking Doyne did not really understand the question when it was asked. I do not think he really understood what riskless profits means, as opposed to high probability profits, but I also feel he had never considered the ethics of his mathematical modelling (the Professional Standards Board of the Chartered Institute of Banking are interested in my work because they have found it virtually impossible to get the ethics agenda into the "quant" world). I believe the moral vacuum in finance is not endogenous to commerce but has <a href="http://magic-maths-money.blogspot.co.uk/2012/05/financial-crises-ethics-and-academics.html" target="_blank">entered the discipline from academia</a>, that is dominated by a strict fact/values dichotomy. Doyne's response was a suggestion that I was evoking some sort of Protestant shaming. I pointed out usury prohibitions were Catholic, the Protestants removed them. But in a sense I was; the previous night Lord May had called for a "professionalisation" of banking, so that those who bought the profession into disrepute could be expelled. The legal, accounting, actuarial, and banking professions all emerged in Presbyterian Scotland, with a tradition of shaming, before Episcopal England. One of the features of contemporary finance is that it is impenetrable for public scrutiny, every thing happens behind closed doors, and so it is difficult to "shame" bankers into probity. If no one asks you if you are behaving ethically, because they cannot see what you are doing, you do not have to worry aebout behaving ethically. Mauss <a href="https://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CCMQFjAA&url=http%3A%2F%2Fbooks.google.com%2Fbooks%2Fabout%2FA_General_Theory_of_Magic.html%3Fid%3DT7TgmEpJYcAC&ei=n50SVP22L9ieyAT67YKYBg&usg=AFQjCNGE2I5V69OYfajS907e9-t6VT5mGg&sig2=vGmjXBOV-FTtZx7uZmu0cw&bvm=bv.75097201,d.aWw" target="_blank">made the point</a> that the difference between science and magic is science is a public activity (like religion) where as magic is purposefully secret.</div>
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After the session closed I went to the pub with a couple of ecologists and explained that I asked the question because before the nineteenth century commerce was seen as a <a href="http://magic-maths-money.blogspot.co.uk/2013/08/what-doux-commerce-means-to-me.html" target="_blank">civilising</a> (as in supporting civil society) force, not the destructive force we think of today. Shakespeare personified the virtue of charity in Antonio, <a href="http://magic-maths-money.blogspot.co.uk/2012/03/markets-morality-and-mathematics.html" target="_blank"><i>The Merchant of Venice</i></a>, something that is inconceivable today. The origins of actuarial science are in the Scottish Ministers' Widows' Fund, a synthesis of <a href="http://magic-maths-money.blogspot.co.uk/2013/08/faith-hope-and-charity-in-genesis-of.html" target="_blank">Faith, Hope and Charity</a>. Later I was asked "What changed", I took a breath and answered "Darwin".</div>
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Starting with Malthus the cooperation metaphor - a key theme in eighteenth century economics, including in Adam Smith - is replaced by the competition metaphor. The economic system shifts from one designed to co-ordinate (equitable) supply and demand to one designed to winnow out the weak and inefficient. <a href="http://link.springer.com/article/10.1007%2Fs10551-014-2257-x" target="_blank">I have argued</a> that this reflects society replacing a fear of the uncertain with a concern for scarcity (recall that there were a series of famines in Europe in the second quarter of the nineteenth century), enabled by Laplacian probability reducing distributions to expectations. I do not suggest Darwin was responsible for this shift, but he does personify a general trend that included <a href="http://en.wikipedia.org/wiki/John_Stuart_Mill" target="_blank">Mill</a>, <a href="http://en.wikipedia.org/wiki/Herbert_Spencer" target="_blank">Spencer</a>, <a href="http://en.wikipedia.org/wiki/Francis_Galton" target="_blank">Galton</a>, <a href="http://en.wikipedia.org/wiki/Thomas_Henry_Huxley" target="_blank">Huxley</a> et al., all now seen as pre-eminent figures of English nineteenth century thought. I think the demotion of humans to be "just" another class of animal was a key feature of this period (and this is the opinion of a firm atheist) and was a central result of the nineteenth century biologists.</div>
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Something I had not thought of occurred to me on the final day of the workshop. At some point someone had asked if there was the concept of redundancy in economics. I think I answered, but it might only have been in my head, that there is not in economics but there is in finance, where, since the Scottish Ministers' Widows' Fund, at the latest, there has been the issue of reserves. Listening to some of the ecologists I noted that there were repeated references to optimising energy use as a key feature of ecological thought. Similarly a key tool in the physical sciences is minimising energy or maximising entropy. This thought was followed by the thought that physicists often try and see a conceptual relationship between money and energy which seems to completely mis-represent the nature of money.</div>
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Sitting in Heathrow's Terminal 5 I thought that the terminal was a masterpiece of efficiency but probably the most inhuman place I had ever been, worse than a nuclear power plant or production line. Waiting for my flight I wondered if the relationship between ecology and economics was more profound that I had ever appreciated, and that the striving for efficiency in economics is in some sense the application of ecological principles. <a href="http://en.wikipedia.org/wiki/Alfred_Marshall" target="_blank">Alfred Marshall</a> is known for both improving the mathematical rigour of economics and advocating the adoption of biological techniques: “the Mecca of the economist lies in economic biology rather than in economic dynamics [i.e. mechanics].” The problems of finance are that a financier's tendency to hold reserves in a stochastic market are challenged by the economist's desire to use capital efficiently, as an animal uses energy efficiently. This is feasible because a Lapacian can reduce a distribution to an expectation and possible because a scientist separates facts and values and sees man as beastly, not virtuous.</div>
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I have come to conceive of markets as <a href="http://magic-maths-money.blogspot.co.uk/2014/04/the-legitimacy-of-high-frequency-trading.html" target="_blank">centres of communicative action</a> reliant on the norms of reciprocity, sincerity and charity. In this formulation mathematics is not used to determine (predict) the truth but as a language to facilitate discourse. I believe, based on sociological studies of the markets, that when market makers offer a price they can be seen as making a claim, which can be challenged by speculators and arbitrageurs, who either accept the claim/price and let it pass, or challenge it by taking the price or offering their own. In this sense mathematical models are used to justify claims, furthermore I believe this practice of using mathematics in justifying claims in finance was adapted in both politics, to deliver democracy, and science: I do not believe in stochastic systems models can be used to predict, only to justify in a discursive process.<br />
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This might seem academic and irrelevant, the practical usefulness is that it enables me to identify why practices described by Farmer might be unethical, rather than relying on an instinct that speculation in complex financial instruments just can't be right (where as geo-engineering, genetic modification or nuclear weapons are OK). I aim to show in my research, that such markets can offer growth without creating the inequality that Michel Loreau objected to, but I feel is a consequence of the aim at efficiency that a 'Darwinian' economics demands. <br />
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A popular tweet from the meeting was<br />
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Farmer ends on 'ecological approaches could play important role, but requires abandoning some fundamental assumptions in economics'<br />
— Eco Squared 2014 (@e2c2o2) <a href="https://twitter.com/e2c2o2/status/509374300034715649">September 9, 2014</a></blockquote>
<script async="" charset="utf-8" src="//platform.twitter.com/widgets.js"></script>
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and I ask myself: is this a good thing? Has society been served well by efficiency replacing redundancy in finance and competition metaphors replacing cooperation metaphors in economics? Before ecologists invite economists to abandon some of their fundamental assumptions I would like them to explain how their approaches differ from Darwin's argument articulated in <i>The Descent of Man</i><br />
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My object in this chapter is to shew that there is no fundamental difference between man and the higher mammals in their mental faculties.</blockquote>
and that<br />
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The great break in the organic chain between man and his nearest allies, which cannot be bridged over by any extinct or living species, has often been advanced as a grave objection to the belief that man is descended from some lower form; ... At some future period, not very distant as measured by centuries, the civilised races of man will almost certainly exterminate, and replace, the savage races throughout the world. At the same time the anthropomorphous apes, as Professor Schaaffhausen has remarked, will no doubt be exterminated. The break between man and his nearest allies will then be wider, for it will intervene between man in a more civilised state, as we may hope, even than the Caucasian, and some ape as low as a baboon, instead of as now between the negro or Australian and the gorilla.</blockquote>
In contrast to Darwin, in <i>An Inquiry into the Nature and Causes of the Wealth of Nations </i>Adam Smith argues that humans are distinctive from other animals in the degree to which they are co-operative<br />
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Two greyhounds, in running down the same hare, have sometimes the appearance of acting in some sort of concert. Each turns her towards his companion, or endeavours to intercept her when his companion turns her towards himself. This, however, is not the effect of any contract, but of the accidental concurrence of their passions in the same object at that particular time</blockquote>
Humans are different to animals in that they exhibit<br />
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the propensity to truck, barter, and exchange one thing for another.</blockquote>
Markets are not simply a technical tool to facilitate life, but they capture a key distinction between humans and other animals. I am not convinced that it is progressive to lose the 'civilised' aspect of humanity.<br />
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Pragmatism requires me to consider the practical implications of my aim. Someone asked a BBC radio news program what would be the relationship between an independent Scotland and the BBC. As with everything no one knows what will happen post independence (because the nationalists have told us what they want not what they might be able to deliver). The news was not positive for the lover of BBC's Radio 4. It then struck me that much of the independence debate is focused on the unionists pointing out to people who "have"what they might lose in an independent Scotland: jobs, low mortgage rates, large research grants, a stable currency and the BBC. Of course, if you have no job, no mortgage, no money and watch Sky but pay for the BBC, you have nothing to lose but the chance of winning in the nationalist vision of a wealthy and fair society. For me the independence referendum, and the potential for a FN victory in France and the rise of UKIP are the consequences of basing markets on the theory of competition, that accepts the inevitability of extinction of those who can't keep up, rather than social cohesion.</div>
Tim Johnsonhttp://www.blogger.com/profile/06952723922503939504noreply@blogger.com3